Will we lose our AAA rating, and what happens afterwards?

Before delving into this discussion, I thought it would be useful to give a brief explanation of what Standard and Poor’s Rating Agency (S&P) ratings actually mean. It has become a relatively big buzz-word amongst political pundits over this election season. AAA rating is the highest possible rating, implying that the likelihood of a country to repay its debts is most likely and that is it most unlikely that a country will default on its debts.The ratings often impact the ability to borrow at lower rates; the higher your rating level, the lower your interest on the loans you incur. These international rating agencies aren’t perfect and there’s been many times where they’ve made serious blunders, but it’s quite obvious to see where the international rating agencies are coming from.

Over the last few weeks, S&P has demoted Australia’s rating outlook from ‘stable’ to ‘negative’. This is attributed to our growing level of Government net debt as a % of GDP and our inability to form a stable government that can make hard change. This is more weighted towards the latter. In comparison to the other twelve AAA rated countries, our net debt is actually on the lower side; at around 17.9% and the median of these countries is approximately 26% as of 2015. However, more importantly, the absence of a Government that can enact real and lasting changes within the budget have seriously impaired our credibility. Our revolving door of prime-ministers and the instability shown within our leadership from the last election is sure to rattle some bones.  Even with the Coalition securing a majority Government, the size of that majority is small and its up in the air whether they will enact some serious change to offset our debt in the next budget.

Deficit isn’t necessarily a negative thing. There have been many times when Labour and Liberals have used it to bolster the economy, or avoid a serious rough patch. But with our growing annual debt levels of approximately 3% a year, it’s seeming unlikely for a party to govern and lead Australia into a surplus where they can be considered stable. At least not in this political climate.

So what are the consequences, and is there a solution?

The consequences of being downgraded are a higher foreign risk premium on all foreign loans, which would result in higher interest rates for borrowers within Australia, whilst interest rates for lenders would not be equally increased. It can lead to a major drop in the value of our currency, which may seriously impact our international buying power and our imports. It would also lead to banks and finance companies paying more for their debt raising when completing offshore debt issuance. Consequently as usual they are more likely to pass it on to the customer. Fortunately for most peer to peer lenders, it will have little effect as these lenders are accessing local money investors who do not have to consider the currency risk, and country rating.

Being downgraded in S&P ratings can also lead to some seriously negative morale within the Australian economy. There’s still an opportunity for Australia to pull through and make sure that we don’t lose our AAA rating. We’re watching infighting within Parliament and within the parties themselves. Without any co-operation, we’re seeing leaders being thrown under the bus the moment there approval rating hits a specific number.

Without any solid leadership and an apprehensive Australian population, it’s hard for either party to make a solid stance and tighten the belt come budget-day. The solution is much easier said than done and the party that can achieve this goal is truly worthy to be within Government.