Here’s a tip for anyone trying to run the line that Australia’s credit rating might be threatened by the Federal Government’s stimulus spending and an associated rise in debt: don’t, Moody’s has stolen your thunder.
Moody’s pointed out overnight (in a report in the subscriber part of the Moody’s website) that the ratings group “does not expect rating downgrades in the near future, especially after the recent downgrade of Ireland (from AAA to AA1 with negative outlook) which had been the most ‘vulnerable’ AAA.” According to Moody’s countries like Australia are not under any pressure from rising spending or debt levels because of the credit crunch and recession.
Unlike the ratings of financial derivatives, which contributed to the crunch and recession, especially in the US and Europe, (which has brought justified criticism on groups like Moody’s) sovereign debt ratings retain enormous credibility.
Pierre Cailleteau, Managing Director of Moody’s Sovereign Risk Group said in the statement that, “Spain, the other ‘vulnerable’ AAA, for now retains a safe distance from the AAA-AA demarcation line, mainly because potential growth is not likely to be as low as anticipated and also because the government’s balance sheet was comparatively solid at the beginning of the crisis,” he adds.
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“Moody’s believes that the UK and US, the two countries that have lost altitude in the AAA space, continue to warrant the “resilient” characterisation. However, to retain their “resilient” status, the UK and US will need to severely adjust their fiscal policies, even in the unlikely event of a vigorous rebound in their economies.
“In the case of the US in particular, Moody’s maintains the view that — once there is a consensus on the need to address fiscal imbalances — the country continues to have an exceptional relative ability to grow out of its debt and its capacity to cut spending and/or raise taxes also remains significant,” says Mr. Cailleteau.”
Moody’s has Australia on a stable outlook. It announced in May that despite a weakened fiscal position (like virtually every other Triple A rated country), the country’s Triple A rating is not affected.
Since that statement Australia’s economy has shown itself to be less effected than any other in the OECD, unemployment won’t reach the Government’s forecast of 8.5%, more like 7% or less, according to private economists and that means the government’s financial position will be better and debt levels will end up lower than forecast.
“Although highly unlikely, it is conceivable that a large and wealthy economy could lose its AAA rating if it were to experience a material and irreversible deterioration in its debt conditions over the next five years or so,” said Mr Cailleteau said.
The credit rating agency continues to divide its triple-A governments into three categories: the resistant, the resilient and the vulnerable.
Moody’s reaffirmed Britain’s AAA rating in April and said at the time that the outlook for the rating was stable. That came after Standard & Poor’s had warned there was a chance it could downgrade the UK rating.
If Moody’s can’t find reasons to downgrade the UK and the US, which have debt and spending levels much higher than Australia’s any claim that Australia’s rating will be under threat will be mischievous and the product of a lazy political mind.
Just as claims that interest rates here will rise because of the spending and the debt burden. Those claims are coming from the Opposition and some excitable commentators.
They haven’t looked at the credit growth figures from the Reserve Bank which show falling demand for loans from business, with housing lending solid, but less than half the levels of the last boom, falling personal spending and weak credit card spending.
Rates will rise because of the strengthening level of demand in the economy and the danger that the RBA sees bottlenecks ahead, especially in housing.
The flip side of interest rates at the current level for the RBA’s cash rate of 3% is that this is supposed to reflect the “emergency” nature of the situation when the RBA cut rates earlier in the year, not the normal level of activity in the economy.
A cash rate of 3% signifies fears the economy is in recession: is that what the Federal Opposition is really saying?
America’s rates are lower: 0% to 0.25% for the Federal Funds rate, which the Fed says will remain at this level for an “exceptionally long period of time” not because the US economy is in fine fettle, but because it is still a basket case, no matter what the stockmarket and the greenshooters party claims.