Real truth about New Zealand debt

In his November 10 Op-Ed in this paper, David Tripe, an academic in banking studies, assays the significance of the downgrade of New Zealand debt from Aaa to AA.

While informative, the article appears flawed by political bias. It's also lacking in context.

When we talk about credit ratings of debt we're implicitly addressing investors who would be willing to assume that debt for a reasonable return based upon the degree of risk involved. The ratings given by the agencies, S&P; or Moody's have been presumed to provide guidance as to the degree of risk.

The trouble is that the credibility of the agencies, themselves, has been shaken. After the near collapse of the US financial system caused in large part by the accumulation of mortgage backed debt by many financial institutions, it was found that the agencies had rated that debt as AAA, despite the fact that internal emails of some of the issuing brokerages described that debt in terms such as "mountains of excrement". When the rating agency heads were called before Congress to explain their ratings they universally claimed "it was only an opinion".

The subsequent lack of attention that investors gave to those "opinions" can be seen by the effect which the downgrade of US debt had on the market: absolutely nothing.

We've been treated to the misstatements of bankers like Don Brash and John Key comparing our country's debt position to that of Greece. While I am not alone in debunking this nonsense, it remains current because politicians don't embarrass easily and never let fact get in the way of good propaganda.

Michael Lewis's latest book, Boomerang, does an excellent job of analysing the financial crumbling successively of, Iceland, Ireland and Greece. In Iceland, people who made an honest living fishing for 1100 years suddenly believed they could become investment bankers without a shred of experience.

The Irish who had long been bereft of land ownership over the centuries suddenly began a real estate bubble that dwarfed the Tulip Craze of the 17th century.

Greece's problems stem from an endemic corruption in which every transaction of consequence involves bribery and no one pays honest taxes. But the real worm in their apple is the fact of the Euro. Greece might have pulled itself out of its debt problem by devaluing currency, making its exports desirable and increasing revenues. Greece, though, depends upon the European central bank and is caught between proverbial rocks and hard places.

Here are New Zealand facts we need to keep in mind. We have a strong currency. Our own central bank controls it, mostly. New Zealand is ranked one of the least corrupt countries on earth, the 3rd most business friendly and the 99th most likely to default.

Mr. Tripe's clear statement that our sovereign debt (Government debt) is not a problem is welcome. It's his conflation of a large private debt with current account debt and attribution of this debt to our attraction to foreign goods, an implied moral failing, that I find objectionable. As a banker, he must know that current account debt (that $300 million of weekly borrowing we hear about from National and its darker twin ACT) is significantly due to transactions by our banks largely owned by Australian companies.

The article suggests that our overspending is the cause and predicts tough times ahead and a devaluing of our currency with higher import prices. What's missing is that we have had lower value of our currency as few as two years ago.