S&P Warns on New Zealand Ratings And Currency Skids

WELLINGTON (Reuters) - Standard & Poor's warned on Monday that New Zealand's foreign currency rating could be downgraded if the country continues to pile up more foreign debt, sending its currency reeling by a full U.S. cent.

The ratings agency said it was revising New Zealand's foreign currency outlook to negative from stable, citing a widening current account deficit and credit risks in its banking sector. An actual cut in the AA+/A-1+ rating could well lead to an increase in borrowing costs for the country and its banks.

"The outlook revision on the foreign currency ratings reflects 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 S&P sovereign ratings credit analyst Kyran Curry.

Curry said the negative outlook meant there was around a one-in-three chance of the rating actually being downgraded. He also emphasized that there would be no change anytime soon and this was a change in the medium-term view which covered the next two to three years.

The agency said increased fiscal savings by the National-led government would be crucial in avoiding a downgrade.

That was a point acknowledged by New Zealand Finance Minister Bill English, who said it underlined the importance of cutting back on foreign debt. The country has net foreign liabilities of more than NZ$160 billion.

"This is a long-standing problem for New Zealand and has left us vulnerable as a country," English said, adding that the government was taking steps to reduce this external vulnerability and was committed to returning the budget to surplus by 2016.

Indeed, English was confident that action already under way on the budget and debt would be enough to avoid a downgrade.

Investors, however, were not so optimistic and knocked the New Zealand dollar down over a cent to $0.7733, while pushing government bond yields higher.

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I have to admit this surprised me. I had the NZ dollar pegged as a fairly safe currency bet in a world where that is not real common.