Speaking at an Asia-Pacific investment outlook event, BlackRock Australia head of fixed income Steve Miller said there is a “real risk" of a downgrade to Australia’s credit rating following statements by Moody’s and Standard & Poor’s.
Mr Miller, who downplayed the threat of an ‘imminent’ downgrade in February, said Standard & Poor’s (S&P) announcement last week that it had lowered its credit outlook for Australia to ‘negative’ makes a downgrade more likely on the balance of probabilities.
“The message from S&P is this – you’ve had your foot close to the line in the sand for a long time,” Mr Miller said.
“Your foot’s probably on the line right now. If you don’t get your foot off the line in six to 12 months, the balance of probabilities is you’ll be downgraded,” he said.
Mr Miller echoed concerns from Moody’s this week that the make-up of the new federal parliament will made fiscal consolidation difficult.
“The nature of the parliament that we’ve ended up with after the election is a very narrow Coalition majority with a potentially more fractious Senate,” he said.
“And that cocktail is not one that I would have thought was conducive to any meaningful fiscal reform.”
But given the relatively high yields on Australian sovereign bonds, a downgrade to AA+ is unlikely to be “the end of the world”, Mr Miller said, adding, “France is AA+ and its yield curve is negative out to eight years.”
“The point being that the bigger phenomenon acting on markets at the moment is not credit differentiation at the high end of the spectrum. [Instead] it’s about the big hunt for yield [that is] going on, and Australia’s well-placed (depending on how you view these things) to be a recipient of flows associated with that hunt for yield,” he added.
Mr Miller noted that RBA head of financial stability Luci Elli was quoted in the Fairfax Media on Tuesday saying that credit rating downgrades tend to be priced into markets and the effect of any downgrade to Australia would likely amount to “not much”.
“Going from AAA to AA+ is not something we need to lie awake at night and think about all the time,” Mr Miller said.
“There may come a time when there is an alarming deterioration, but that is certainly not what we’re saying [now].”
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