Australia’s AAA Sovereign Rating Under Threat Says S&P

Post by Sharat on December 5, 2008 · Under Australian Economy, Featured Articles · Comment

Standard & Poor’s, the credit rating agency is considering whether to downgrade the Australian sovereign risk rating. The rating agency has previously downgraded Australia’s sovereign debt twice in the past, first in 1986 and again in 1989. The credit rating agency restored Australia’s top rating in a two step upgrade back in 1999 and then again in 2003.

S&P analyst Kyran Curry said “there is a lot of pressure on the AAA rating on Australia at the moment. We’re seeing a dramatic weakening of economic growth against the background of the Government running down its fiscal position, combined with the talk of additional borrowing, plus perhaps a significant contingent liability that could present to the Government if some of the guarantees get called.”

Mr. Curry also added that of concern was Australia’s persistently high current account deficit, and warned that Australia’s top notch credit rating must never be taken for granted.

The Federal Government guarantee on Australian bank wholesale money market funding has added additional strain and the ratings agency has said it must be factored into its credit worthiness. ”[The risks of banks calling on the guarantee] might be remote and unquantifiable, but they are still there and we need to factor them into the rating.”

The rating agency is not questioning government policy and even endorsed the Government response to the downturn, saying that fiscal stimulus was “completely sensible”, though the agency also warned the impact of a sustained depletion of the government’s fiscal position would “weigh on the rating”.

To Lend Or Not To Lend

Meanwhile the Government has still not come up with an adequate response to the proposal of an infrastructure bank being put forward by state governments. State governments have seen a dramatic impairment of their borrowing ability after the Government guaranteed domestic commercial bank borrowings.The Government bank guarantee has given private banks a privileged position in accessing credit versus state governments, which has dramatically affected the latter’s borrowing ability.

Queensland Treasurer Andrew Fraser recently wrote Federal Treasurer Wayne Swan asking that the Commonwealth Government of Australia act as borrower on behalf of state governments. That idea has not been well received, but Mr. Swan when asked about the proposal to establish an infrastructure bank with the same purpose declined to give an answer.

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