NSW and Victoria downgraded, but credit ratings are all but meaningless

In a world gone mad, as far as the old rules of fiscal prudence and investment are concerned, these downgrades matter not a jot.

Greece gets to borrow at just 0.65 per cent on its 10-year bonds. Photo: Margaret Wenham

Going to the weekend Australia had three Triple-A borrowers.

Now it only has one, the Feds in Canberra – and with federal debt heading for $1 trillion, and then on to $1.5 trillion, you’d have to believe we will be down to zero Triple-As in the not-too-distant future.

Yet in a world gone slightly – slightly? – mad, so far as the old rules of fiscal prudence and investment are concerned, the downgrades matter not a jot.

I’ll give you one example to really make the point.

Australia is rated Triple-A – just one of 11 countries so rated. They do not include the US or the UK or Japan.

We have to pay just a tick over 1 per cent to borrow for 10 years.

Greece has to be the ‘poster boy’ of countries gone fiscally disastrous and with its citizens forced to pay real and harsh penalties for that fiscal mismanagement – outside those like Venezuela and Zimbabwe, which are right outside normality.

At the height of its debt crisis, Greece was paying up to 20 per cent on its 10-year bonds. It’s now still rated a miserable, barely above insolvency, Double-B.

And do you know what it’s now paying on its 10-years bonds? All of around 0.65 per cent interest.

No, that’s not a misprint: Greece rated Double-B gets to borrow at not much more than half the interest rate that a Triple-A rated Australia does.

Does that make any sense? Well, it does in the world of 2020 that has been made by central banks, forcing interest rates down to zero and flooding markets with trillions of dollars of printed money.

Take our own Reserve Bank. It has set its official interest rate at just 0.1 per cent. It is lending money to the banks at that 0.1 per cent, making them unwilling to pay much more to borrow in the market from depositors and investors.

It is also buying bonds in the market to keep their yield – their interest rate – at that same 0.1 per cent, for terms out to three years.

It is also now buying longer dated bonds. With these, it doesn’t have a yield target; but instead a volume target of so many billions of bonds a week, a month, which does keep the rate low.

We’ve never lived in a world like this before; where all the central banks and most importantly the big ones – the US Fed, Japan’s BoJ and Europe’s ECB – are all doing it.

The net effect is that interest rates just about everywhere are hugging zero; and there are tens of trillions of dollars of cash swirling around the world looking for either a return or for security. Credit ratings are all but meaningless.

Yes, you do get small differences that matter big time to big players – one country’s 10-year bond like Greece at 0.65 per cent; another like Germany’s at minus – yes, minus – 0.6 per cent.

The bottom line is that investors are either seeking a return – and so we see the global surge in share prices, and also property prices. Or they are seeking security – but within that umbrella of what central banks are doing.

So, yes, investors are prepared to lose a fraction of their investment by buying German bonds, getting just $99.40 back in 10 years for $100 invested.

But they are also prepared accept 60c of interest each year on a $100 invested in a Greek bond as ‘similar security’.

Translate this to Australia, and the Victorian and NSW downgrades won’t make the slightest difference to their ability to borrow and the rate to be paid. The same would be the case if Australia was downgraded.