S&P puts Australia on credit watch

THIS is what happens when you don’t pay your bills. Australia is one step closer towards losing its coveted triple-A credit rating.

THIS is what happens when you don’t pay your bills.

Australia is one step closer towards losing its coveted triple-A sovereign credit rating, with ratings agency Standard & Poors downgrading its long-term outlook from stable to negative due to “growing fiscal vulnerabilities”.

S&P said there was a one-in-three chance the rating could be lowered within two years if measures to improve the budget position are not passed by parliament.

“The negative outlook on Australia reflects our view that prospects for improvements in budgetary performance have weakened following the recent election outcome,” the agency said in a statement.

The last time Australia lost its triple-A rating was in September 1986, when both Moody’s and S&P downgraded to AA1, and then again in August 1989 to AA2. Australia didn’t regain its triple-A rating until August 2002.

AMP Capital chief economist Dr Shane Oliver warned over the weekend that Saturday’s inconclusive election result would likely result in a ratings downgrade.

“It’s no great surprise,” he told news.com.au. “After the election the writing was on the wall. We’re now looking at a worse run of budget deficits than we saw when the rating was last cut in 1986.

“We’re facing years of slippage in return to surplus and the messy election result points to more slippage, regardless of who wins.”

Dr Oliver said other ratings agencies would likely follow suit. The outlook downgrade is effectively a “credit watch” ahead of a possible future downgrade.

“I thought they would either put us on watch or downgrade us, so obviously they’re putting us on watch and giving themselves more time to think,” he said.

A country can remain on a negative outlook for up to two years without being formally downgraded, Dr Oliver added.

“But I suspect it’s probable that a formal downgrade will follow unless the new government is able to hold the line on the budget deficit projections which will be hard given the likely state of the Senate.”

The Australian dollar fell slightly on the news from around 75.3 US cents to around 74.7 cents, but has since recovered to around 75 cents.

Malcolm Turnbull’s promise of stability has proven challenging to deliver. Picture: Jason Edwards

Federal Treasurer Scott Morrison moved to allay fears of a downgrade, emphasising that the Standard & Poors’ new outlook was based on post-election uncertainty.

“We believe that fiscal consolidation cannot be postponed or slowed, and S&P have said the same thing today,” Mr Morrison said during a press conference this afternoon.

But he acknowledged the difficult task that lies ahead if his party manages to form government.

“The Government, should we be able to form a Government again in the next few days or weeks, has every intention of ensuring that we maintain the credibility of our AAA credit rating by ensuring we maintain that fiscal trajectory,” the Treasurer said.

He warned against any policy changes that would tamper with the Coalition’s cost-cutting agenda, and that “higher deficits, particularly over that short-term, would be at a great risk of seeing the AAA credit rating — which remains in place today — potentially being downgraded in the future.”

‘THE WORLD IS WATCHING’

Mr Morrison stated that the ratings agency had effectively endorsed his budget, sending a clear message to independent and minor party MPs about the potential impact of stymieing his party’s reform agenda, while acknowledging that it would not be “an easy thing to achieve”.

“If we are to form a Government over the next few weeks, you have our absolute undertaking that we will work constructively and in a highly engaged fashion with the Parliament, to bring the Parliament with the Government to ensure that we can maintain the financial strength of the Government and of the country as a result,” he said.

“I think it is a time for obviously sober reflection on the fact that the world is watching, particularly our ratings agencies are watching about whether that fiscal consolidation pace can be maintained and achieved.”

Asked if he felt responsible for today’s grim news, Mr Morrison reverted to the Coalition’s jobs and growth mantra, saying the party had “a clear plan” to maintain the nation’s fiscal health. He would not be drawn on whether company tax cuts should be reconsidered.

“This is a negative watch, it’s not a downgrade,” he said. “Secondly, the report has been issued on the basis of the election outcome ... They’re concerned that the outcome of the election — not the budget.”

He said the agency’s concerns about “the pace of fiscal consolidation” would be allayed if the Coalition formed Government.

“Now I have no intention of postponing the pace of fiscal consolidation and so therefore I remain very determined to ensure that the warnings that are in this report are not realised by maintaining the position that we’ve put to the Australian people in terms of the fiscal path we’ve set out.”

— With Dana McCauley

..thoughts on a rating downgrade for Aust were contained in this https://t.co/UW07IhiY3n Not a good outcome for Aust - back to 1986!

— Shane Oliver (@ShaneOliverAMP) July 7, 2016