Video | Agriculture | Confidence | Economy | Energy | Employment | Finance | Media | Property | RBNZ | Science | SOEs | Tax | Technology | Telecoms | Tourism | Transport | Search


US downgrade reflects ‘blatant abuse’ of its global position

US debt downgrade reflects ‘blatant abuse’ of its global position

Aug. 8 (BusinessDesk) – The U.S. sovereign debt downgrade to AA+ from AAA reflects credit rating agency Standard & Poor’s view that the world’s largest economy is “blatantly abusing” its privileged position as the world’s reserve currency, says Andrew Bascand, head of Wellington-based funds manager Harbour Asset Management Ltd.

Bascand’s special commentary on the downgrade coincides with a fresh release from S&P this afternoon singling out New Zealand as being vulnerable to ratings downgrades because of the U.S. downgrade.

While S&P says the downgrade should have no necessary impact on the credit ratings of other Asia-Pacific nations, it says New Zealand, Japan and Vietnam are not included in those countries having “generally stable outlooks”, predicts a worse impact on exporting countries from a slower world economy, and renewed pressure on countries running large Budget deficits.

While most Asia-Pacific governments would be expected to prop up their economies by using their national balance sheets, some “continue to bear the scars of the recent downturn.”

“The fiscal capacities of Japan, India, Malaysia, Taiwan and New Zealand have shrunk relative to pre-2008 levels,” S&P said.

“If a renewed slowdown comes, it would likely create a deeper and more prolonged impact than the last one,” with more negative implications for creditworthiness than previous experienced.

“A larger number of negative rating actions would follow,” S&P said. “We wait and see.”

Countries with financial systems highly reliant on offshore market funding could suffer reduced liquidity, including New Zealand, among other Asia-Pacific nations such as Pakistan, Sri Lanka, Australia, Korea, and Indonesia.

S&P is not yet saying it expects prolonged global financial market turmoil from both the U.S. and European debt problems.

It is operating on a “baseline assumption of no likely abrupt dislocations in developed economies’ financial and real economies.”

“However, given the inter-connectivity of the global markets, an unexpectedly sharp disruption in developed world financial markets could … lead the U.S. and European economies into deep contraction again, or further delay their recoveries.”

In his analysis, Bascand says the U.S. debt ceiling political crisis was a “red herring”, with the potential for slow American and European growth the real driver of the last few days’ falls in stocks, bonds and global currencies.

In theory, the U.S. should not have been downgraded, since it issues only U.S. dollar-denominated debt and can “print money” if the need arises to pay it off. As the world’s current reserve currency, the world has also been a natural holder of U.S. debt.

“We think the S&P rating decision reflects an opinion that they now view the U.S. to be blatantly abusing that privileged position,” said Bascand.

Saturday’s S&P downgrade announcement was particularly critical of the role of the Republican Party majority in the U.S. Congress for its role in the debt ceiling crisis.

“We have changed our assumption on this because the majority of Republicans in Congress continue to resist any measure that would raise revenues,” the S&P statement said.

Meanwhile, ASB Bank economist Christina Leung, says world financial markets are in for a “volatile 72 hours” as the implications of both U.S. and European events are digested.

While the ASB still expects the Reserve Bank of New Zealand to raise the Official Cash Rate by 50 basis points to 3% next month, “risks have grown over the past week that the RBNZ will delay that hike.”

Bascand predicts that if the U.S. Federal Reserve is forced over coming months to run looser monetary policy, it’s possible that will help maintain the U.S. dollar value of commodity prices, which have been underpinning a stronger outlook for the New Zealand economy.

Harbour Asset says it remains attracted to New Zealand equities, has shunned exposure to banking stocks, and is overweight in the domestic healthcare and resources sectors.


© Scoop Media

Business Headlines | Sci-Tech Headlines


Maritime Union: Deepening Supply Chain Crisis Requires Action

Maritime Union of New Zealand National Secretary Craig Harrison says the global COVID-19 pandemic exposed pre-existing weaknesses in our logistics sector, and created enormous problems... More>>

Air New Zealand: Employees Recognised With $1,000 Share Award

The efforts Air New Zealand employees made during one of the airline’s toughest years will be recognised via an award of $1,000 worth of company shares to all permanent employees... More>>

Consumer NZ: Bank Complaints On The Rise, Survey Shows

Nearly one in five Kiwis had a problem with their bank in the past year, Consumer NZ’s latest satisfaction survey finds. Consumer NZ chief executive Jon Duffy said the number of bank customers reporting problems had jumped to 18%, up from 11% in 2020... More>>

Mercury: Enters Into Binding Agreements To Acquire Trustpower’s Retail Business

Mercury NZ Limited (Mercury) has announced that it has entered into binding agreements with Trustpower Limited (Trustpower, NZX:TPW) to acquire Trustpower’s retail business for NZ$441 million... More>>


ASB: New Zealanders Missing Out On Hundreds Of Millions In KiwiSaver Government Contributions

New Zealanders have just over a week to ensure they’re eligible for the maximum annual government KiwiSaver contribution... More>>

Stats NZ: GDP Climbs 1.6 Percent In March 2021 Quarter Following December Dip

Gross domestic product (GDP) rose by 1.6 percent in the March 2021 quarter, following a 1.0 percent fall in the December 2020 quarter, Stats NZ said today. "After an easing of economic activity in the December quarter, we’ve seen broad-based growth in the first quarter of 2021... More>>