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May 20, 2014

Why Australia could do with having S&P downgrade our credit

A rating downgrade will have little effect on the Australian economy -- and is unlikely to happen anyway, Bernard Keane and Glenn Dyer write.

Is Australia’s triple, triple-A credit rating at risk, as today’s Australian Financial Review article suggests, with a “wake-up call for opponents of the budget” from Standard & Poor’s?

No, in short, no matter how much the AFR applies the eggbeater to the yarn to fit the fixation of editor-in-chief Michael Stutchbury that we have a debt and deficit crisis. Indeed, S&P appeared to back right away from the Financial Review’s story this morning, saying “there is no immediate risk to Australia’s AAA rating”.

Moreover, it doesn’t particularly matter if it did downgrade us. Standard & Poor’s is the firm that downgraded the United States government from triple-A in 2011, with the rationale that the gridlock and brinkmanship in the US Congress over the budget had undermined “the effectiveness, stability, and predictability of American policymaking and political institutions”. S&P also downgraded France and several other countries on a similar basis. S&P now appears to be laying the groundwork for a similar observation about Australia if the Senate blocks key elements of the Abbott government’s budget.

We already know that Medicare co-payments, increases in higher education loan repayments and the government’s targeting of Newstart recipients will be blocked — Labor, the Greens and Clive Palmer have all said they’ll oppose them. That will eat up more than $6 billion of the $22 billion improvement in the budget bottom line over forward estimates from December “budget crisis!” Mid Year Economic and Fiscal Outlook and last week’s budget. And further blocks in the Senate will increase that: while petrol excise indexation and the deficit levy look safe, any other cuts will further reduce the actual improvement in the deficit.

On the positive side, however, it’s also hard to see the Coalition’s proposed 1.5% corporate tax cut, which will cost nearly $10 billion across forward estimates, get through the Senate either.

What the S&P warning reflects as much as the potential impact of a recalcitrant Senate is that, as the graph shows, last week’s budget didn’t actually do a lot to improve the deficit compared to the apocalyptic forecast Hockey produced in December, partly as a deliberate decision of macroeconomic policy — even with low interest fates and deficits in the tens of billions, economic growth is predicted to fall, so Hockey was correctly reluctant to cut harder, sooner — and partly because the pain directed at low- and middle-income earners, foreigners, the young and students is offset by increasing generosity to corporations and high-income earners via the tax system.

But if S&P did cut our rating, what then? Well, there would be mass cheering in corporate circles and down at Martin Place at Reserve Bank headquarters in Sydney, and there would be some restrained, muttered chortling, because life would have gotten easier. At least, that’s the theory.

The Reserve Bank doesn’t particularly respect Standard & Poor’s and its incorporation of politics into the their ratings. If you look at the US, its position has improved immeasurably in the past year, despite S&P’s downgrade. Moody’s and Fitch didn’t change the US rating, and later this year a very chastened S&P will lift the US rating back to AAA — it has changed its US outlook from negative to positive, which says an upgrade is on the way.

Global interest rates are likely to stay at their current low levels for the next couple of years (some former central bankers reckon five years) because of low inflation and the continuing impact of quantitative easing. In the US, quantitative easing is being wound back, but in the UK, it’s in place and not changing; in Japan, it’s in place and could be increased if economy slows; and in the eurozone, a big announcement on some sort of easing is expected in two weeks’ time at the European Central Bank meeting.

And besides, ratings cuts haven’t altered the ability of the US to borrow, nor have negative outlooks damaged the UK’s borrowing costs. And all those pariahs in the eurozone — Italy, Greece, Spain, Portugal, Ireland and France — can all now borrow at rates much cheaper than at any time in the past eight years or more. In normal times, credit ratings have an impact on borrowing costs, but these are not normal times and won’t be for several more years as the global economy and the global financial system recovers from the devastation caused by the GFC.

A loss of our AAA rating would result in more downward pressure on the dollar, which in turn would be welcomed by exporters and tourism operators. Beyond that, the economy would not be damaged one bit.

As for the government, there’d be mixed feelings: it could use a downgrade as leverage on the crossbenches in the Senate, and a lower dollar would be a boon for the budget bottom line, but it would also leave the Coalition exposed to Labor’s charge that it has thrown away the triple, triple-A rating that Wayne Swan secured as treasurer.

A senior Reserve Bank official, Guy Debelle, the assistant governor in charge of financial markets, is due top speak in Adelaide today. It will be fascinating to hear his remarks on the AFR story and S&P. He is due to speak around 1.15pm Sydney time.

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5 thoughts on “Why Australia could do with having S&P downgrade our credit

  1. Jaybuoy

    down is the new up.. no tax on miners in the production phase but we let them have tax write offs for the construction phase.. we are going to pay polluters to not or whatever..
    chopping down trees is what the true conservator does.. dredging and dumping will make the reefs water quality better..cattle grazing in national parks is good for park..people on Manus and Nauru are carpetbaggers..

  2. AR

    Jaybuoy – you seem obsessed with reality & facts. They are simply doing what Darth Cheney attempted during the neocons’ various wars – making a new reality to fit their beliefs.

  3. Dogs breakfast

    “and that means it’s more than $1 billion a month, every single month, just to pay the interest on the borrowings”

    Crikey, you quote Tony Abbott as saying the above in your editorial.

    Although it’s not a direct lie, it’s damned close to one. In the context of what difference a change in our credit rating would make to the interest payments per month, it is the difference the interest change would make that is relevant, not the whole dollar cost.

    And what about comparing it to the GDP, or perhaps any of the big corporates loans book, or the fact that the private sector debt, at much higher interest rates, absolutely dwarfs the public debt.

    Or what about a comparison to Tony Abbott’s own household balance sheet. Based on a conservative guess at his mortgage to his annual income, I’d bet my bottom dollar that his personal finances look woeful in comparison to the federal budget.

    But TA is no liar. An obfuscator, a conman, a charlatan, a used-car salesman, perhaps, but no liar.

  4. Jimmyhaz

    I’m confused as to why we have a credit rating in the first place. Our sovereign currency means that our fiscal position will have no impact on our ability to secure funding.

    Regardless of the politics or impact of this decision, I just can’t see a reason for us to care about what a private entity rates our zero-risk bonds.

  5. griffin27

    Regarding the cost of being downgraded from AAA to AA, Walker and Walker, in their excellent book (see below), did the figures, and it is minuscule. The extra interest payments are in the order of a few millions per annum. They really do expose this ‘argument’ for various economic policies (privatisation in their case) as being little more than a mantra. Mind you, this mantra is very powerful in its ability to hypnotise economic commentators and even the public.

    Does anyone have the book handy, to look up the actual figures? (“Privatisation — Sell-off or Sell-out? The Australian Experience”, Bob Walker & Betty Con Walker, 2008)