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Friday, September 30, 2011

Fitch, S&P downgrade New Zealand's credit rating

New Zealand's credit rating has been downgraded by two of the three major ratings agencies amid increased global concern over high debt burdens in developed nations.

Fitch and Standard & Poor's on Friday downgraded New Zealand from an AA+ rating to AA.

In the past, New Zealand has enjoyed strong sovereign credit ratings due to relatively low levels of government borrowing that offset worries about the country's high private debt. But the ratings agencies have become less sanguine after an earthquake and weak economic growth strained the government's finances.

The agencies are taking a harder line on any form of debt in the wake of the global financial crisis. Countries such as Ireland, which was forced to bail out banks after the global recession, have demonstrated how private debt can easily become a problem for the government.

The downgrade weighed on the New Zealand dollar. It was trading late Friday at $0.7639, down from $0.77 the previous day. It was worth as much as $0.88 two months ago.

In its review, Fitch said New Zealand's high level of external debt is "an outlier" among comparable developed nations, a situation which is likely to continue given that the current account deficit is projected to increase. A current account deficit typically shows that a country is spending more than it earns and relying on borrowing to make up the gap.

Standard & Poor's cited increased spending by the government following February's earthquake that killed 181 people and devastated the center of Christchurch, New Zealand's second biggest city.

According to S&P, negative factors include the country's high levels of household and agricultural debt, its reliance on commodities for income, and an aging population.