International credit ratings agency Standard & Poor's has downgraded the outlook on New Zealand's sovereign debt rating from stable to negative citing concerns about the amount of private debt built up in the banking sector.

The rating, which reflects the Government's ability to repay debt was reaffirmed at AA+/A-1+ but the downgrade reflects a one in three risk that it may fall soon.

"The outlook revision on the foreign currency ratings reflect our recognition of the risks stemming from New Zealand's projected widening external imbalances in the context of the country's weakened fiscal flexibility," said Sovereign Ratings credit analyst Kyran Curry.

"New Zealand's vulnerability to external shocks, arising from its open and relatively undiversified economy, also raises risks to the country's economic recovery and credit quality."

Prime Minister John Key said he understood there was no new information that had prompted S&P's move and no specific issues were raised when the Finance Minister Bill English met with them just two weeks ago.

"What is true is they are reflecting on our total overall indebtedness particularly the issue that the Government has been talking about for some time which is our level of private sector indebtedness and the fact that we rely so heavily on foreign borrowings for that."

Mr Key said he believed recent developments in Ireland's financial situation and uncertainty in the international financial markets had forced S&P to reassess sovereign debt risks.

Mr Curry told the Herald the decision came down to high levels of indebtedness in New Zealand's banking sector.

While New Zealand's external position had improved in the last year or so, "It seems likely that as the economy strengthens further, the external imbalances will come back and perhaps come back with a vengeance."

New Zealand's banking sector had performed well during a period of international difficulty "nonetheless in an environment where the risks are elevated - and we've seen governments that have formerly had very strong fiscal positions get routed through distress in the banking systems - we are more or less observing that New Zealand has a very high dependence on foreign capital and if investors start to worry about other banks being able to meet their obligations then that could come back to bite the sovereign rating."

Given what S&P saw as the preparedness of the government to come to the assistance to the banking sector, "if the net external liabilities of the banking system continue to grow, it doesn't matter how strong the balance sheet of the Government might be, it'll provide quite a challenge to them".

Mr English said the news highlighted New Zealand's need to reduce its heavy reliance on foreign debt.

"This is a long-standing problem for New Zealand and has left us vulnerable as a country," he said.

"The Government is taking steps to reduce this external vulnerability and to move the economy towards savings and exports. They include the tax changes in the Budget this year and work currently underway with the Savings Working Group. From here, it's important that our economic programme continues."