NZ banks too reliant on offshore debt for S&P 23 November 2010 5:37PM Sophia Rodrigues New Zealand banks' heavy reliance on overseas funding is the main reason for a cut in the outlook on NZ's foreign currency rating to negative from stable by Standard & Poor's. S&P affirmed the current foreign currency credit ratings at AA+ for long-term debt and A1+ for short-term debt.S&P left the outlook on the AAA local currency rating unchanged."The outlook revision on the foreign currency ratings reflect our recognition of the risks stemming from New Zealand's projected widening external imbalances in the context of the country's weakened fiscal flexibility," S&P said in a statement.The Reserve Bank of New Zealand has been highlighting the risk from increased reliance on offshore debt. In the latest Financial Stability Report, RBNZ noted that banks remain vulnerable to deterioration in market sentiment towards the Australasian region given the reliance of the banks and their Australian parents on external wholesale funding.While banks have in the last two years managed to lengthen the average maturity of their foreign funding, the proportion of funding raised from offshore markets hasn't seen any significant decline.It is true that attractive rates in offshore markets are tempting banks to tap that source but it is also true that cost of funding in the domestic market has been increasing because of competition for retail deposits arising from the requirement on banks to meet higher core funding ratios.It is for this reason that the RBNZ is keen to see the covered bond market develop and has indicated it will issue formal limits on such issuance by the end of next month.On the other hand, the government has also promised to take steps to reduce New Zealand's external vulnerability and to move the economy towards savings and exports.