AAA Rating

[Rorschach]

Why I'm sorry our credit rating wasn't downgraded this week
Ross Gittins



You can tell by when a government releases its midyear budget update how well it's going with the budget. If it's doing well, it publishes as early in December as possible.

If it's doing badly, it publishes as close to Christmas as it thinks it can get away with, when normal people are busy with parties and preparations and not paying much attention.

This year we got the update just six sleeps before Santa's arrival. Draw your own conclusions.

And this year the government was worried, we're told, that the continued slippage in its efforts to repair the budget would prompt the credit rating agencies to downgrade our AAA status.

Labor was already salivating at the prospect, with finance spokesman Jim Chalmers confidently predicting a downgrade would "smash confidence in our economy" and "push up borrowing costs for households and small businesses".

You beauty! If that doesn't improve Labor's chances of beating the Coalition at the next election, what will? A little damage to the economy in the meantime? A price Labor would be happy for us to pay.
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In the event, however, all three ratings agencies announced the update had done nothing to change their views.

But the government isn't off the hook. The most aggressive publicity seeker of the three, Standard & Poor's, didn't confirm our AAA rating, it said the update gave it no reason to change its "negative outlook" for that rating.

So the agency's supposed fiscal sword of Damocles remains hanging over Scott Morrison's head at least until the budget in May.

To tell you the truth, I'm sorry it didn't fall this week. That's not because I bear the government any ill will, but because the sooner we're downgraded, the sooner the public will realise there's little to fear from a downgrade. The ratings agencies are toothless tigers.

In any case, there is no good reason any sovereign Australian government – federal or state – should allow a few American for-profit businesses to dictate how much it should or shouldn't borrow (nor engage in hugely expensive ways of disguising the true extent of its liabilities).

The ratings agencies' credibility has been destroyed by their part in the global financial crisis. Not only did these all-wise experts fail to see it coming, they contributed to the conflagration by awarding AAA ratings to the promoters of "collateralised debt obligations" – for the small fee – that soon turned into "toxic debt".

It's long been questionable whether the agencies were leaders or followers in identifying the risks attached to the bonds issued by businesses and governments, but since the GFC there's little doubt the financial markets don't need their advice.

When Standard & Poor's downgraded US government bonds in 2011, the financial markets took no notice and the two other agencies left it hanging out to dry.

S&P downgraded Greece's government bonds only months after its budget cover-up became public in 2009.

All three agencies downgraded Britain's bonds immediately after Brexit, but market yields (interest rates) on those securities actually fell.

So it's not at all clear that a downgrading of our credit rating would do anything much to increase the interest rate at which our government can borrow.

And while it's technically true a downgrading of Australia's "sovereign" credit rating would flow on to the ratings of our banks, it's not clear this would increase their borrowing costs abroad, nor that there would be any flow-on to home buyers and small businesses.

While Labor's Chalmers was telling anyone who'd listen of the disaster about to befall everyone with a mortgage, the chief executive of ANZ Bank, Shayne Elliott, was telling his shareholders that a downgrade had already been priced into the funding costs for Australian banks.

Should the banks actually pass on that increase on to their customers, it would tell us less about the Turnbull government's budget failings than about the failure of successive governments – Labor included – to do enough to encourage greater competition between the big four banks, generous party donors that they are.

It suits neither the government nor the opposition to admit that the rating agencies' pressure on us to cut government spending is diametrically opposed to the advice we're getting from the two genuine international economic authorities, the International Monetary Fund and the Organisation for Economic Co-operation and Development.

Their advice is that, with our economy weaker than it should be, we still have plenty of "fiscal space" to strengthen the economy by borrowing to finance increased spending on worthwhile infrastructure.

All this is why I say that, these days, the economic significance of our credit rating is long gone.

It retains much political significance, however. Governments – federal and state – still live in fear of a downgrade simply because they know their political opponents would parade this as a disaster for the government, the economy and public and private borrowers, and objective, authoritative proof that they are utterly hopeless economic managers.

Credit ratings are now little more than something the politicians use to slag each other off.

This is why I'm sorry we weren't downgraded this week. Only when the public experiences the ratings agencies' inability to have much effect on the interest rates we pay will they lose their power over our governments, and the pollies lose credit ratings as a political football.

Ross Gittins is the Herald's economics editor.

So as I have been saying for years the AAA is just used as a political football if the ALP were in government they would be ignoring the threat of a downgrade... and if you didn't think ratings agencies had little credibility before the GFC there is no excuse for not thinking it now.

[Neferti]

I think that "they" should raise the interest rates, just so those kids who have a Million Dollar Mortgage REALLY understand what it means to SAVE and SAVE and go WITHOUT to get a MORTGAGE.

Plus these kids still think they will get an AGE PENSION when they retire?

[Super Nova]

I remember the days of high interest rates. If I had known interests rates would be so low for so long I would have borrowed as much as I could 15 years ago. Kids have no idea about saving but to be fair they see they need to get on the property market asap because the rate of savings is too slow compared to price increases. We have a world at the moment were it pays to have huge debts BUT the crunch will come when interest rates return to the old days. Many will just go bust. So I expect there will be pressure to keep rates low for a very long time.

[Neferti]

I remember the days of high interest rates. If I had known interests rates would be so low for so long I would have borrowed as much as I could 15 years ago. Kids have no idea about saving but to be fair they see they need to get on the property market asap because the rate of savings is too slow compared to price increases. We have a world at the moment were it pays to have huge debts BUT the crunch will come when interest rates return to the old days. Many will just go bust. So I expect there will be pressure to keep rates low for a very long time.

My daughter SAVED and SAVED (her husband is MDI - Bipolar) to get enough for a deposit on a 4br house. Nothing exciting but she has 3 kids and they all want their own space.

She still does ALL the work and is constantly "exhausted" ...

He is useless ... doesn't believe in Christmas ... it's a PAGAN thing, didn't you know? He calls himself Christian and has convinced my daughter and her kids that they will ONLY get into Heaven if they take notice of the crap he spouts.

I am NOT Christian ... dead is dead, there is no After Life. Blah blah.

My problem is that this nutter will, eventually, share what I have and go on a rampage ....

[Black Orchid]

I absolutely cannot fathom how anyone can say that young people don't need to save and save today. House prices have risen (in Sydney) exorbitanty and wages have not kept in step.

[mantra]

It retains much political significance, however. Governments – federal and state – still live in fear of a downgrade simply because they know their political opponents would parade this as a disaster for the government, the economy and public and private borrowers, and objective, authoritative proof that they are utterly hopeless economic managers.

I think our rating should be downgraded so we can start being more realistic about our borrowing and spending. It is getting out of control yet again. This year private borrowing has been higher than it has been for years. We saw what happened in 2006/2007 when we reached that same peak.

It is inevitable that this will lead to higher interest rates this time around. The Coalition has been no better than Labor at reining in their spending.

[Rorschach]

Well its hard to reign in spending when Labor locks you into things like the NDIS... and its hard to reign in spending when the ALP and the Greens and a few lunatic Senators won't pass your legislation.

As for interest rates... globally downgrading to AA or AA+ has made no difference in other countries.

[Rorschach]

One more time...

And while it's technically true a downgrading of Australia's "sovereign" credit rating would flow on to the ratings of our banks, it's not clear this would increase their borrowing costs abroad, nor that there would be any flow-on to home buyers and small businesses.