New Zealand is in a dangerous debt spiral

By Oliver Marc Hartwich
10 March 2011

The earthquake that struck Christchurch two weeks ago was not only a national catastrophe for New Zealand. It is also becoming clear how devastating it is to the Kiwi economy. The New Zealand Treasury estimates an impact of 1.5 per cent of GDP, or $NZ15 billion, for this year. Prime Minister John Key went further and warned that the country’s economy could stand still in 2011 instead of growing 2.5 per cent, as initially forecast. The consequences for public finances will be substantial in any case.

Unfortunately, dealing with the tragedy of the earthquake is not New Zealand’s only problem. Natural disaster has hit a country that could ill afford it. Even before the darkest hour in New Zealand’s history, its economy did not look healthy. The similarities between the Kiwis and troubled European countries are too disturbing to overlook.

The financial crisis has made us remember some half-forgotten truths. One of them is that countries with negative net foreign assets and large government liabilities are in danger of being shut out of capital markets.

Article from Business Roundtable