Australia in Danger of Credit Downgrade

Australia received a warning from Standard & Poor’s (S&P) this week that it is on downgrade watch. Although the nation presently enjoys a AAA rating, the downgrade warning signals that Australia will likely soon receive a reduced rating.

Australia received a warning from Standard & Poor’s (S&P) this week that it is on downgrade watch. Although the nation presently enjoys a AAA rating, the downgrade warning signals that Australia will likely soon receive a reduced rating.

According to analysts, there is now a one-in-three chance of reduction in Australia’s rating within the next two years. The likeliest cause would be a failure to increase taxes or cut spending sufficiently to head off ever-increasing budget deficits and public debt. If it occurs, it would be the first downgrade of the nation’s credit since the late 1980s.

Although less damaging than an actual downgrade, S&P did put the nation’s rating on a “negative” outlook this week, moving it from “stable,” in the wake of Saturday’s election. According to Australian Treasurer, Scott Morrison, “We all, the government in particular, need to live within our means…Fiscal consolidation cannot be postponed or slowed…This is an important reminder of something the government has always known and sought to deliver upon in the three budgets we’ve sought to deliver over the last three years.”

A major point of concern for S&P remains Australia’s offshore debt levels. The agency feels that Australia is allowing its debts to become far too high to continue to justify the top rating of AAA.

In a statement, the agency released Thursday, it said, “We believe that without remedial action the government’s fiscal stance may no longer be compatible with the country’s high level of external indebtedness.”  Further “We will continue to monitor, over the next six to 12 months, the success or otherwise of the new government’s ability to pass revenue and expenditure measures through both houses of parliament.”

It went on to say “ We could also lower the rating with any further weakening of Australia’s external position…This could come from current account deficits remaining at the higher end of the historical range, from a further weakening of terms of trade, or from an increase in the banking sector’s cost of external funding.”

Some analysts say the possible downturn is not surprising.

According to AMP Capital Economist, Shane Oliver, “Australia has now seen years of slippage in returning the budget to surplus and the messy election outcome threatens more slippage whichever way it goes.”

He added, “Of course being put on negative watch is not the same as a downgrade and a country can remain on a negative outlook for up to two years without being formally downgraded.”

Oliver offered “But I suspect it’s probable that a formal downgrade will follow unless the new government is able to hold the line on the budget deficit projections, which will be hard given the likely state of the Senate.”

Although one way out of the possible downgrade would be to increase tax revenues, Treasurer Morrison suggests that this would be folly for the nation at this time.

“You have to be very careful if you increase the tax burden on the Australian economy at such a sensitive time as this,” he said. “The idea of ‘let’s tax the economy more because it will raise more revenue’, I think, really is a fairly short-sighted approach in terms of how you grow the economy.”