Has the Government done enough to shield New Zealand from the latest global financial shocks?
New Zealand stocks tumbled to an 11-month low, as already jittery investors across Asia move to sharply limit their risk exposure after Standard & Poor's slashed the United States' credit rating over the weekend.
The NZX 50 fell 96.86, or about 3 per cent, to 3179.64 at midday, heading for its lowest close since September 30, however by 3.30pm it had trimmed some of its loses and was 2.5 per cent lower.
America's debt rating was cut for the first time by Standard & Poor's to AA+ over the weekend.
The downgrade has hit stocks across Asia with Hong Kong shares slumping 4.07 per cent while the benchmark Nikkei was down 2 per cent in early afternoon trade.
Australia's S&P/ASX 200 Index dropped 1.9 per cent when the market opened wiping another $10 billion from the market's value, adding to the $100 billion that was shed last week. However it went on to claw back some of those loses trading down 0.7 per cent in early afternoon trade.
It comes as the world is plunged into fresh uncertainty over the latest shock to financial systems.
Since New Zealand's sharemarket closed on Friday afternoon, the US has suffered a ratings cut from AAA to AA+ on negative outlook and concerns have rippled across Europe about Italian and Spanish debt.
The European Central Bank signaled late yesterday (local time) it would start buying Italian and Spanish debt, a critical move to quell a bond rout that has rocked financial markets.
Australian stocks dropped for a fifth day in a row as investors reacted to the first downgrade in history for US debt.
At least $27 billion (Aus) was wiped from the value of the local market in the opening minutes of trade, adding to the $100 billion that was shed last week.
Early trading showed a sea of red on NZX50 companies as sellers continued to dominate. The index fell 3.3 per cent in the first 20 minutes as it drove to an 11 month low, but has since recovered ground siting at 2.2 per cent lower by mid afternoon.
Philip Hunter at First NZ Capital said it was not surprising that the market was down as investors waited to see how the rest of the world would react to the downgrade of the United States credit rating.
The market was "predictably weak and there is not a lot of buying at this stage".
"People will be waiting to see how the Australian and Asian markets go for a bit of a lead," Mr Hunter said.
Few investors were selling, with trading volumes light despite the global sell-off of shares last week.
Overnight markets in the Middle East, which open Sunday to Thursday, were the first to react to the impact of the United States' credit rating downgrade. Dubai's main market index was down more than 4 per cent and in Israel the market delayed its opening as pre-opening trade showed its benchmark index dropping more than 6 per cent.
The NZX's website struggled to cope with demand as market watchers worldwide looked to New Zealand's sharemarket - the first to open this week.
The site was unavailable at times this morning, leaving market watchers in the dark about share prices in one of the most anticipated trading days of the year.
NZX spokeswoman Rowan Macrae said the issue was one of capacity.
"The sheer volume of data requests being put through has slowed things down,'' she said.
"It's absolutely capacity. It's huge this morning.''
Website volume was the highest ever experienced at the stock exchange, she said.
The New Zealand dollar rose against the greenback this morning, which has further struggled since the credit downgrade. The kiwi recently traded at 84.14 US cents, up from 83.74 cents on Friday in New York.
PM BELIEVES NZ IN GOOD SHAPE
Prime Minister John Key said this morning that the Rugby World Cup and the rebuild of Christchurch would help buffer New Zealand.
Since the global financial crisis in 2008, the New Zealand Government has built up a $5 billion buffer by bringing forward its borrowing programme while the markets were still liquid – and just as fresh uncertainty hits the world over the US downgrade and worsening debt crisis in Europe, the amount of debt the Government needs to raise on world markets has dropped sharply.
Key said the situation is serious for the United States which is under negative watch by credit rating agencies. Political bickering between the Democrats and the Republicans on the degree of spending cuts needed to solve the debt crisis in the US had led to a "watered down" solution which sparked the downgrade.
While US politicians had only "kicked the can further down the road", New Zealand's economy was in much better shape, he said. When National came to office in 2008, it was very difficult to borrow money on the international markets.
"The Government, and the Treasury, had been very conservative in its spending and had fixed the issues the rating agencies were concerned about at a government level," he told TVNZ's Breakfast programme. "We are back in surplus in a few years."
The worst scenario for New Zealand would be for the US to go back into recession, Key said.
It was unclear what the fallout in New Zealand would be, he said. "But what is good is that Australia is our biggest market, China our second. So we have other markets other than just the US."
The Government had done all the right things to buffer the reverberations of the US downgrade and continuing volatility in Europe, Key said.
"All any government can do is what we have done – get our books in order, be conservative in our spending, and frontload our borrowing requirements ... We've used the last 12 months of much more liquid markets to pre-fund ourselves."
In a move criticised at the time, the Government was borrowing up to $1 billion in some weeks before the May Budget because – it said – interest rates were low and money was easy to raise.
That was in contrast to 2008, in the midst of the global financial crisis, when credit was both scarce and costly.
In the weeks before this year's Budget, the Government was borrowing, on average, about $380 million a week, but from July 1 that dropped to an average $100 million a week.
"There was a period in the first quarter of 2009 when ... none of the domestic banks raised any funds on the international market and it was very challenging for the Government," Key said yesterday.
"We're in much better shape than that. The minister of finance and Treasury have been very conservative in their thinking and that's been proven to be correct."
The downgrade puts America on a par with New Zealand – which shares its AA+ credit rating – but rates it as a worse credit risk in Australia.
- Tracy Watkins, Roeland van den Bergh, Tim Hunter, Laura Westbrook and Jason Krupp