Four days after warning that it might place Australia’s credit rating on a negative footing, ratings group Standard & Poor’s did just that yesterday morning in a surprise move.
But despite a momentarily blip, the news had no lasting impact on the value of the dollar or bond yields.
S&P’s move has become increasingly likely after the ratings group did not issue a commentary in the wake of the Federal budget in early May, unlike Fitch and Moody’s which gave the budget a conditional tick.
The announcement of the creditwatch negative outlook (from stable) means Australia is no longer at the top of the tree of ratings (AAA stable from Moody’s, Fitch and S&P) had a predictable impact on the dollar (pushing it down for half an hour or so) and the stockmarket (pushing the ASX 200 a touch lower), it had no impact on bond yields.
The 10 year bond yield remains around 1.86% to 1.88% which is close to all time lows as bond yields around the world are dragged lower by fears the Brexit vote in the UK has the potential to trigger a new financial crisis – starting with the Italian banking system (and as soon as tomorrow). The impact on the dollar was predictably fleeting – a dip to around 74.85 US cents or thereabouts and then a rebound half an hour or so later back over 75 US cents to more than 75.20, returning to the range it was trading in before the announcement from S&P.
In its statement S&P said, “The negative outlook on Australia reflects our view that without the implementation of more forceful fiscal policy decisions, material government budget deficits may persist for several years with little improvement. Ongoing budget deficits may become incompatible with Australia’s high level of external indebtedness and therefore inconsistent with a ‘AAA’ rating. S&P said that in view of the deadlocked outcome of the July 2 general election it believes “fiscal consolidation may be further postponed.”
In fact the credit watch negative outlook will not impact Australia’s cost of borrowing money offshore one bit and even though other corporate and state ratings from S&P will be cut, that also won’t have any impact.
The group changed the outlook from “stable” to “negative” just days after all three major credit ratings agencies reaffirmed the country’s AAA status.
The move places policymakers on notice of a cut to the nation’s credit rating in the next 18 months, should there be no signs of an improvement in the fiscal outlook.
It follows an uncertain federal election result over the weekend, with S & P noting on Monday the political clouds decreased visibility on the outlook for the local economy. The downgrade came on a morning when it appears the Turnbull government’s position in the House of Representatives has improved with chances rising that it might be able to get a majority with support of some independents.
S&P now includes political factors into its ratings – it did use that as the justification for reducing America’s rating from AAA to AA negative (now stable) in 2011.
The AMP’s chief economist Dr Shane Oliver said yesterday that, "Being put on negative credit watch by a ratings agency is not surprising. 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.
“In short a downgrade is not disastrous but it would be a bad sign for Australia.
“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.
“But I suspect its 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,” Dr Oliver wrote yesterday.
