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The Wall Street Journal announced today that Standard & Poor’s Ratings Services and Fitch Ratings both downgraded New Zealand’s government debt on Friday, citing the country’s worsening external-debt position and the costs of earthquake recovery.

But the WSJ warned there may be worse to come

“the double-downgrades come at a sensitive time for the island nation as it hosts the Rugby World Cup, a global sporting event that New Zealand’s leaders have hoped would add at least a modest boost to the struggling recovery.”…

…S&P expects “New Zealand’s external position will deteriorate further at a time when the country’s fiscal settings have been weakened by earthquake-related spending pressures and fiscal stimulus to support growth.” It cited New Zealand’s “very high external imbalances, which are accompanied by high household and agriculture-sector debt, dependence on commodity income and emerging fiscal pressures associated with its aging population.” read more here

The world cup may not provide the long hoped for $700 million in direct economic returns that the government was banking on, a figure that was considered wildly over-optimistic by senior academics.

Figures released today by Paymark showed that tourists will have to spend big time to get the country out of trouble. They’ve only  spent $88 million since the Rugby World Cup started on September 9 and spending is already starting to slow.

New Zealand’s Green Party issued a press statement saying

Standard and Poor’s sovereign credit downgrade this afternoon is further evidence that the Government’s economic management is in disarray, Green Party Co-leader Dr Russel Norman said today.

Standard & Poor’s has cut its long-term foreign currency ratings on New Zealand to ‘AA’ from ‘AA+’ and its long-term local currency rating on New Zealand to ‘AA+’ from ‘AAA’.

“The bad economic news of this morning’s downgrade has just gotten worse,” said Dr Norman.

“The National Government has not been a smart economic manager through these difficult times and now it’s going to increase the cost of borrowing for us all.

“Fitch’s downgrade earlier today focused on the widening current account deficit. Standard and Poor’s have focused on the Government’s poor fiscal management, citing a blow-out in borrowing to pay for the rebuild of Christchurch and National’s stimulus package of tax cuts.

“The Government’s failure to consider revenue-raising options, in the form of an earthquake levy to help pay for the rebuilding of Christchurch, is now being shown up as short-sighted.

The Green Party warned on March 24, 2011, that New Zealand faced the risk of a credit downgrade due to the Government relying solely on borrowing to pay for the rebuild of Christchurch instead of striking a levy.

“The Green Party’s temporary earthquake levy would have raised an additional $1 billion each year to cover quake-related expenditure avoiding costly borrowing and the chance of a downgrade.

“Australia raised a levy after their flood disaster and their Government was, at the time, in a much better fiscal position than ours.

“National must also accept responsibility for their poorly timed and poorly designed tax cuts – cuts which helped fuel record levels of Government borrowing and failed to effectively stimulate the economy in recession.

“The New Zealand economy has many strengths, but our current economic managers in the Beehive are not one of them,” Dr Norman said.

Insurers Back Off

Further bad news came from an insurance company who has announced it is no longer prepared to offer cover in New Zealand. It could turn out to be the leader of a rout of insurance companies offering earthquake cover in New Zealand

British owned Ansvar Insurance lost  NZ$700 million in the Christchurch earthquakes. It was the largest insurer of heritage buildings and churches. There are very real fears that other companies will do the same, forcing the NZ government to step in and provide some level of cover. We predict that, given their debt situation, they will have no option other than to impose an earthquake levy if they make it through the next election.

Ansvar’s ratings have just been reviewed:

“A.M. Best Co. has downgraded the financial strength rating to ‘B++’ (Good) from ‘A-’ (Excellent) and issuer credit rating to ‘bbb’ from ‘a-’of Ansvar Insurance Limited (New Zealand), and has placed both ratings under review with negative implications.

The rating actions reflect Ansvar New Zealand’s “weakened risk-adjusted capitalization and its significantly higher levels of reinsurance recoverables following the successive Christchurch earthquakes between September 2010 and June 2011,” Best explained…” read more here

For more about problems hindering the recovery read Christchurch rebuild stalls as problems mount