Credit downgrade could expose Australia

A downgrade to Australia's prized AAA credit rating would make it much harder for the nation to weather the next global economic downturn, according to Bond Adviser.

Global credit ratings agency Moody’s Investors Service warned that the government’s unwillingness to raise revenue in the May 3 federal budget could threaten Australia’s ‘AAA’ rating.

According to fixed income research house Bond Adviser, if Australia were to lose its AAA rating, a downgrade of the big banks’ senior rating to A+ could follow.

“The four major [banks] have a stand-alone credit profile [SACP] of ‘A’,” said Bond Adviser.

“The rating agencies then apply a further two notches uplift to the SACP due to potential extraordinary government support (in the unlikely event it is required) to boost the senior credit rating to ‘AA-’.”

If Australia were to receive a downgrade to ‘AA’ on the foreign currency rating, the banks could initially escape a downgrade if the local currency credit rating were to remain at ‘AAA’, said the research house.

“However, the rating agencies could decide to downgrade the banks’ senior credit rating to ‘A+’ for a multitude of other reasons,” said Bond Adviser.

Among these are concerns about economic imbalances relating to the banking sector’s reliance upon foreign funding; increasing credit risks surrounding the housing market (ie, bad and doubtful debts if house prices fall significantly); and a lower likelihood of sovereign support if the total loss-absorbing capacity debate within Australia follows the Canadian route.

“A downgrade to the banks could cause a further increase in funding costs, which in turn would likely be passed on to borrowers as we have already seen,”said Bond Adviser.

“If this happens, Australia will have less capacity to weather the next global or domestic financial crisis.

“Compared to 2008 Australia may not this time have a AAA rating, no budget surplus to cushion any economic blow and a harder task to secure the funding that Australian households need at a time when they have become more leveraged to inflated house prices,” said the research house.