Australian debt level raising eyebrows globally

Australia’s ballooning public debt is raising eyebrows globally.

Christopher Whalen, senior managing director at Kroll Ratings.

Australia’s ballooning public debt, which has more than quadrupled to 40 per cent as a share of GDP since 2007 with little sign of abatement, is raising eyebrows globally.

Canberra’s debt binge is putting at risk a AAA rating from Kroll Bond Rating Agency, an emerging competitor to ratings giants Moody’s and Standard & Poor’s, founded by legendary US businessman Jules Kroll in the wake of the global financial crisis to restore trust in credit ratings.

“If Australia’s government continues to accumulate debt the way they have been, it is certainly going to affect their credit rating,” said Christopher Whalen, senior managing director at Kroll, speaking to The Australian in New York.

“As long as the government keeps its eye on the ball as far as fiscal balance is concerned … I think it will be OK,” he said of Australia, striking an optimistic tone. The Treasury’s debt and deficit forecasts have undershot expectations every year since the GFC, with the federal budget not expected to return to surplus until 2021 at best.

Australia, among the handful of countries rated AAA by the two major rating agencies since 2002, was warned in July by S&P that it could be downgraded. A downgrade would damage the government’s reputation for fiscal prudence, even if it had little ­effect on borrowing costs, which have fallen to record lows amid a global stampede for safe assets.

Kroll, which is already among the biggest players in rating asset-backed securities globally, is planning to release sovereign credit ratings for a suite of nations for the first time later this year.

“The nice things about Australia is the legacy from Britain and society there generally is quite different from other countries in the world. So you have a little bit of leeway but you wouldn’t want to push it too hard,” Mr Whalen said, adding that Australia remained “a big commodity price play” that was suffering from an inevitable slump in prices.

As for China, he said it was “not a market economy and (it) never will be”, and was always going to slow down and could not keep building cities nobody was living in.

An experienced banker who started his career at the Federal Reserve, Mr Whalen said S&P’s decision to strip the US of its AAA rating in 2011 was “absurd”.

“Ratings are relative; the US is clearly a AAA. If people continue to accept US dollars and have a degree of acceptance then why wouldn’t it be,” he said. “I’ve been calling (US Republican presidential nominee Don­ald) Trump for six months, he’s riding the same wave that caused Brexit.”

While refusing to speculate whether Australia would receive Kroll’s top rating alongside the US later this year, he suggested Britain, more exposed to economic reality post-Brexit, probably would not.

“The UK as a stand-alone credit will have problems because its government, without the empire, has not adopted a really entrepreneurial growth agenda but rather a hardcore socialist mentality,” Mr Whalen said. “It has a very strong democratic and competitive political culture which I admire, but at the same time the welfare state is embedded in much the same way as it is in Argentina.”

Mr Whalen foreshadowed further ructions in Europe.

“You may see (Prime Minister Matteo) Renzi lose in Italy and if the Five Star Movement does as well as I think, you could see Italy stay in a trade union, but want the lira back,” he said.

The EU, he said, could not thrive unless a central authority aggregated the credit risks of the various governments.

“Remember the US didn’t have a federal government to speak of until after the first world war: no income tax,” he said.

Asked about economists’ poor forecasting record, Mr Whalen said: “Economists are always wrong. It’s rare you see one who understand microeconomics well enough to realise the generalities of macro are always wrong.”