"The review was prompted by concerns about the sharp deterioration in the country's external accounts," Moody's said.

The current account deficit ran at about three per cent of GDP in the early 1990s but blew out to 7.7 per cent by 1998. Moody's planned to complete its review within three months. The Reserve Bank of New Zealand (RBNZ) last month forecast the deficit would reach 8.2 per cent of GDP this year before improving to 5.5 per cent by 2001.

The New Zealand dollar, which has already lost up to a quarter of its value against major currencies in the past 18 months, plumbed new five-year lows when it fell below 52 US cents from 52.4 cents before Moody's comments.Bank bill rates jumped 17 basis points to 8.64 per cent while 10-year government bond yields rose 11 pips to6.52 per cent. Dealers said the news had been telegraphed earlier this year when Moody's said New Zealand's rating outlook was negative. But the confirmation added to already bearish sentiment and would open the currency to renewed vulnerability.

"Quite clearly it caught the market a bit on the hop," ANZ Investment Bank domestic markets manager Jim Reardon said.

"It's significant that they are again highlighting the current account," he said. "We all know that the next quarter current account is going to be worse still." The market's worst fear, of a similar shift in position by the other large rating agency Standard & Poor's, did not come true. A representatives said its view remained unchanged.

Treasurer Winston Peters said Moody's comments came as no surprise. He repeated that the government stood ready to take more prudent fiscal measures if circumstances changed, and could trim back the level of spending to be committed out of expected surpluses -- spending which it has already sliced backonce.

He pointed to Moody's comments that the current account deficit was derived from weakness in the private sector rather than government accounts, which remained well in surplus.

Partly for that reason, Moody's said New Zealand's triple-A domestic debt rating was not under review and remained "well-supported by the government's strong track record of fiscal surpluses and declining public sector debt".

Yves Lemay, Moody's vice president for sovereign risk, said that March quarter current account data due to be published on June 24 would be monitored. However, Moody's main interest was to look at factors over the course of the next several years that might influence trends in the current account and whether these might help or hinder the potential to reduce the large deficit. "So one question that we will assess... is to what extent the depreciation in the New Zealand dollar that has taken place recently will help to improve the competitive position of New Zealand exporters, and in turn assist in theprocess of narrowing this external imbalance," he said.Bancorp Treasury Services economist Stuart Marshall believed a downgrade was inevitable as the current account deteriorated.

"Nothing is going to get better in those one-to-three months so it (a downgrade) is an inevitability."