The world’s most exclusive club – countries with AAA credit ratings, of which Australia is a member – just got smaller with the news that the Netherlands has had its top notch standing cut by Standard & Poor’s.
At the same time S&P lifted the outlook for Spain and the rating for Cyprus, and Moody’s boosted its rating of Greece as well in a day of mostly good news for the weaker members of the eurozone.
The news means there will be even more demand for Australian dollar-denominated assets because the Aussie dollar is now one of a handful of currencies sitting below the US dollar as emerging reserve currencies for the world’s financial markets and investors.
It could make it a touch tougher for the Reserve Bank to force down the value of the dollar – it kicked up in offshore trading on Friday night by a quarter of a cent after the Netherlands was downgraded.
AUDUSD YTD – Netherlands downgrade means AUD will be in even greater demand
Standard & Poor’s downgraded the Netherlands to AA plus, because of concerns that its growth prospects were weakening, thanks to falling houses prices, weak growth and no real sign the outlook was going to improve for some time.
In addition, there’s a growing political impasse in the country because of the rise of extreme rightwing political parties who are against cutting spending and issues like immigration.
The Netherlands’ downgrading leaves the world’s most exclusive economic club as consisting of Canada, Finland, Germany, Luxembourg, Australia, Singapore, Norway, Sweden, Switzerland and Denmark are still there with AAA ratings from all three ratings groups, Standard & Poor’s Moody’s and Fitch. Liechtenstein has a AAA stable rating with S&P, as has Hong Kong, but not from all three agencies.
But for how long, with Germany and Luxembourg now on a negative credit watch by at least one agency.
The club could very well narrow in the next year, especially after the new government of Germany will consist of a coalition between Chancellor Angela Merkel’s conservative parties and the leftist Social Democrats, which will result in a minimum wage for Germany, plus higher spending and some new tax rises.
The remaining eight, including Australia, are members of an even more exclusive ‘inner club’ of countries with stable outlooks, which means there’s no current chance of a downgrade.
For Australia, the downgrading of the Netherlands means a small rise in the level of attractiveness for the world’s big, conservative investors, such as central banks, insurers (including reinsurers) and supernational groups, from Europe and Asia (includes development banks). It means there will be even more demand for Australian dollar assets, such as federal Government bonds.
A couple of years ago the ranks of the AAA club were much larger.
Since 2011, the US, downgraded by S&P in 2011, the UK (downgraded by Moody’s and Fitch this year ), France (downgraded by S&P, Moody’s in 2012 and Fitch this year), Austria (downgraded by S&P in 2012) and New Zealand (downgraded by S&P and Fitch in 2011) have been stripped of their top status by at least one of the three major ratings groups. Spain lost its AAA rating in early 2009, Italy saw its AAA rating cut in early 2012.
In the case of the UK and France, political considerations ranked highly – especially the chance for a lack of decision making and weak government – as we have seen in France this year and from the US with the silly government shutdown/debt ceiling brawl in October.
So why are the remaining eight still considered to be super safe, AAA rated (stable outlooks) investments?
Well, Norway has huge reserves of oil and a massive sovereign wealth fund that’s been cannily invested (and is the model worldwide for these types of funds).
Finland, the only eurozone country in the super-safe group, has one of the strongest general government balance sheets among members of the Organisation for Economic Co-operation and Development (OECD).
Denmark has relatively low public debt and years of growth-oriented policies.
Sweden’s balance sheet is one of the least leveraged among triple-A sovereigns, with an enviable net debt of 8% of GDP.
Australia and Canada are rich in commodities and diverse economies, and Switzerland is competitive, prosperous and resilient, having withstood the nerve wracking time when the central bank defended the currency to keep it above 1.20 to the euro.
Singapore has high savings, a stable political culture, solid economy that is open and good economic management.
But there are a few hints of possible economic problems for some of these stable AAA-rated economies.
Australia is of course having to make a very difficult transition from the mining boom to a broader-based domestic growth model, and our debt is rising, and economic growth is below par and unemployment is rising slowly.
Growth data this week will confirm that while our economy continues to grow, it is still well under its long term potential.
And the Federal budget deficit has been deliberately built up by the new government, which on Friday provided some grounds for concern for offshore investors by knocking back the bid for GrainCorp from ADM of the US.
Canada’s commodity base is fraying, it has a house price boom that may still get out of control (Singapore has a worrying house price boom as well), but it is next to the huge US economy which is showing signs of renewed economic growth.
Sweden and Denmark (Denmark has had a house price surge as well) seem stable, as does Finland, but if the huge Russian economy slides into a recession (thanks to weak international oil prices and overspending by the government), the Finnish economy could follow.
But there is life after a downgrade as much of Europe can confirm.
While S&P was cutting the Netherlands’ standing, it upgraded the outlook for Spain from negative to stable and also upgraded Cyprus’s outlook as well, and both had been sharply downgraded in the eurozone crises.
S&P raised Cyprus to B minus, from CCC plus. Spain lost its AAA level rating in 2009 when the first eurozone crisis hit and house prices started collapsing, driving up unemployment. The Spanish stockmarket has risen about 21% (the S&P 500 in the US is up 26.7%) this year as foreign investors returned to the market.
And Moody’s raised Greece’s rating two levels of CAA3 due to what it saw as the country’s progress in fiscal consolidation and an improving economic outlook.
