Inside Money: Downgrades not a groin issue

Investors (gamblers) have been granted a premium of 6.25 per cent to bet on the Blacks. Photo / Brett Phibbs

Did ratings agencies Fitch and Standards & Poor's (S&P) have some inside knowledge on the state of Dan Carter's groin prior to their joint NZ credit downgrades?

A world cup loss would, of course, be a severe blow to the nation's morale with incalculable economic consequences. The All Blacks odds of winning the cup widened at the TAB from $1.60 to $1.70 after the news of Carter's groin broke. In effect, investors (gamblers) have been granted a premium of 6.25 per cent to bet on the Blacks.

By comparison, the country's dual credit downgrade appears to have barely moved the premium the NZ government must pay to borrow money, according to Phil Combes, New Zealand Debt Management Office (NZDMO) treasurer.

Combes told me initial bond market reactions indicate government borrowing costs look like they could rise in the order of 10 to 15 basis points (0.1 to 0.15 of 1 per cent) in the wake of the downgrades.

In the week prior to the downgrade the NZDMO raised $1 billion in a rare "mega tender", of which Combes says there have been only four.

He says the decision to borrow such a big lump was driven primarily by investor demand, giving the country the opportunity to access cheaper money than it otherwise would have.

As it stands, Combes says the NZDMO has about $10 billion in cash, more than enough to cover a $7.6 billion bond maturity in November, amongst other demands.

The NZDMO only needs to raise another $2 billion in net debt this fiscal year to meet its targets, which Combes says puts New Zealand at a distinct advantage compared to last year.

"Last year we had to raise $20 billion," he says. "Now our call on offshore capital markets has diminished substantially."

The real test will come this Thursday when the next bond tender goes to market but Combes is confident the NZDMO will be able to raise the money at reasonable rates.

A September 15 article in the Lex column of the Financial Times (FT), however, questioned the country's borrowing status, claiming the so-called 'bond vigilantes' have "alighted on New Zealand".

"Funding strains appear to be visible in the tally of failed government bond auctions: 12 so far this year, surpassing 2010's total," the Lex column claimed.

But Combes disputes this analysis. He says this year the NZDMO only recorded one bond auction failure, that is where it didn't raise the full amount it sought.

According to Combes, the FT claims probably relate to the occasions the NZDMO has exercised its discretion to 'reallocate' different bond maturities to bidders depending on overall demand.

It looks like the bond vigilantes aren't ready to kick New Zealand in the groin just yet.