NZ's high external debt a risk to rating
New Zealand's high external indebtedness can pose a risk to its rating, as the recent example of Spain has shown, Reserve Bank Governor Alan Bollard warned in a speech yesterday.Bollard noted that financial markets and credit agencies use a range of indicators to form their assessment of a country's viability or fragility and while most of the focus now is on sovereign debt and the fiscal accounts, "the recent credit downgrade of the Government of Spain showed overall external indebtedness can play a role in this."Fitch Ratings Agency late last month downgraded Spain's credit rating to AA+ from AAA, citing prospects of slower growth, and listed private sector and external indebtedness as some of the factors that will materially reduce the rate of growth of the economy.In April, Standard & Poor's downgraded Spain to AA from AAA with a negative outlook to reflect downward revision to growth prospects and cited the country's private sector indebtedness as one of the factors dampening outlook. Bollard pointed out that New Zealand is one of the very few developed countries with high net external liabilities, with the UBS country risk index putting it rather higher in terms of external fragility. Interestingly, that index places Australia even higher than NZ in terms of external risk fragility, with Greece, Netherlands and Portugal ranking still higher.Bollard warned that if external deficit continued to rise, the markets would at some stage begin penalising by requiring a larger premium for continued funding, "and the sheer size of servicing our obligations could become an intolerable burden to the country."