Peter Costello: rating downgrade ‘will feed on itself’

Peter Costello has joined ex-Future Fund boss David Murray in warning on the costs of the nation losing its AAA rating.

Former treasurer Peter Costello in Melbourne yesterday. Picture: Stuart McEvoy.

Former treasurer Peter Costello has joined former Future Fund chairman David Murray in warning that a loss of Australia’s prized AAA credit rating would “feed on itself” and put pressure on the banking sector.

Mr Murray, a former Commonwealth Bank boss and the head of the financial systems inquiry, said a cut to the sovereign rating could also eventually flow through to the wholesale funding costs of the banks, corporations and the states.

“It just tightens the screws a ­little bit on the system,” Mr Murray said.

Mr Costello, who also chairs Nine Network owner Nine Entertainment and is the current chairman of the $117 billion Future Fund, echoed the concern about the impact on financial institutions. “If the commonwealth government without a AAA is required to stand behind them, that affects their position,” Mr Costello told The Australian.

“It would first affect the commonwealth government then it would start to affect the financial institutions.”

The warnings by Mr Murray and Mr Costello come after two of the three big ratings agencies this week cautioned that the prospect of a deadlocked parliament stymieing budget savings put the AAA credit rating in danger.

“Now we’re not there yet ... but if we don’t make progress on this budget deficit, we will get a downgrade,” Mr Costello said.

“And you’ve got to say that a minority government or a weak government is going to find it ­extremely difficult to make progress on the budget deficit.” Mr Costello was treasurer in 2003, when ratings agency Standard & Poor’s restored Australia’s AAA rating on the back of a string of budget surpluses during the Howard government.

“I do think this is quite an issue for the country and I think it’s one of the bad things to come out of the election, that whoever forms a government it’s going to be in a weakened position to deal with what is now a significant problem, that is, the continuing budget deficit,” Mr Costello said.

Australia is one of just 10 countries around the world with a AAA rating from three agencies. Credit ratings heavily influence borrowing costs for the commonwealth, but importantly can affect bank borrowing costs.

On Monday, S&P’s said it could lower the rating if parliamentary gridlock on the budget continued, while Fitch Ratings warned of downward pressure on the rating if the political logjam led to a sustained widening of the deficit. Moody’s, another agency said Australia’s credit rating “will be determined by whether fiscal ­objectives are effectively implemented”.

Mr Costello said that “once you are downgraded, it’s a long way back”.

“Once you are downgraded it feeds on itself because when you are downgraded, your interest rates are higher, therefore your budget deficit gets worse because you’ve got a big public debt interest component in there,” he said.

“So it’s easily lost, hard to reverse and it feeds on itself. And that’s a worry.”

AMP Capital chief economist Shane Oliver said banks would feel the impact of a ratings downgrade.

“If it’s an environment where Australia is seen as more risky, people might still buy commonwealth government bonds but say, well you’ve been downgraded, therefore your states are more at risk, or your banks are more at risk,” Dr Oliver said.

Both Mr Murray and Mr Costello issued a call to arms for Canberra to approve budget savings.

As the counting of votes resumed yesterday, it became increasingly apparent that the budget was set to suffer as it is likely that a more unwieldy Senate will baulk at savings measures and crossbenchers extract a price for their support in the House of Representatives.

Australia’s credit rating was downgraded twice in the 1980s, before being restored to AAA again by Moody’s in 2002 and Standard & Poor’s in 2003.

Mr Costello said if the sovereign rating was cut, this would ­affect financial institutions, particularly where they borrow heavily offshore. He said it was crucial to get government spending back down to below 25 per cent of GDP.

The 2016-17 budget, which does not count the cost of deals that would have to be done with the crossbenchers to get office, put spending in cash terms at 25.8 per cent of GDP in 2016-17.

However, industry super fund heavyweight, IFM Investors chair Garry Weaven, cautioned against putting “too much focus” on any ratings downgrade.

“It would be a negative to have a ratings downgrade but I do think at times there has been too much focus on that single issue,” Mr Weaven said. “There are any number of countries that have a lower credit rating than Australia ... The financial markets have had too much influence on public attitudes to what this nation needs.”