Victorian Treasurer Tim Pallas negotiates in New York with the top credit rating agencies

Victorian Treasurer Tim Pallas has a big job ahead in New York. Photo: Asanka Ratnayake/Getty Images

The nation must hold its breath as Victorian Treasurer Tim Pallas negotiates in New York with the top people at credit rating agencies, S&P and Moody’s.

A severe rating downgrade would boost Victoria’s interest bill dramatically. While this would almost certainly stop the state government from embarking on the vast new borrowings it plans, it would harm the national economy and borrowing fabric.

Adding an extra degree of drama to the meetings with S&P and Moody’s is the recent declaration by former Victorian premier Jeff Kennett that Victoria was set to become a modern-day version of the 2001 Enron crash. Kennett says the rating agencies escaped major damages from their inflated ratings of Enron but are vulnerable to damages for their Enron- style inflated ratings of Victoria.

It was a clear warning from Down Under to the current president and CEO of S&P Global, Douglas Peterson, and his opposite number at Moody’s, Robert Fauber.

The presidents of the two rating agencies will rarely have had to make a decision on ratings while a former premier is warning them they will be sued if inflated ratings allow Victoria to borrow too much.

Currently Victoria is rated AA with a stable outlook by S&P and Aa2 with a stable outlook by Moody’s Investors Service. NSW and Queensland are rated AA+ by S&P.

Meanwhile Peterson has announced that he will retire in November and is set to be replaced by Martina Cheung, who is best known for driving sustainable growth strategies at S&P.

Before the New York meeting, Australian S&P management warned Pallas that Victoria’s debt levels are already moving into ratings downgrade territory. But Victorian Premier Jacinta Allen has thrown caution to the wind by committing the state to a $125bn suburban rail loop – the project opponents dub “the train to nowhere”.

Pallas will have the task of convincing Peterson, Cheung and Fauber, or whoever they delegate the decision to, that Victoria is not an Enron.

With his back to the wall, what can Pallas do to convince top people at S&P and Moody’s to hold Victoria’s ratings and/or minimise any downgrading? It will not be easy but there are several arguments that may help:

• Part of the expenditure on the “train to nowhere” project is the acquisition of massive land holdings which Pallas can claim can be sold at a profit to pay part of the cost of the project and give the trains a passenger base. The project will be viable and create a virtual second Melbourne. Making that argument tough is the fact that commonwealth does not like the project and is only giving token help.

• To keep the state debt down the airport rail project has been put on hold. But not erecting a commonwealth-backed project to connect an expanded airport to the city highlights Victoria’s plight. It has the strong support of the Deputy Premier Ben Carroll.

• While high property taxes have people and businesses going interstate, building costs in Sydney are high and Brisbane is over the top. Lower building costs is one reason why Melbourne is set to be Australia’s largest city and the gap will widen.

• Victoria is slashing its costs, including cutting back frontline capacity in health, police and education. The rating agencies may say this is not sustainable and overstaffing of administration in departments should be the target.

• Victoria has embarked on a massive expansion of solar and wind facilities. This will please S&P’s incoming president, Martina Cheung. But those facilities require investment in grid infrastructure and back-up power generation, which makes them very expensive.

The federal Energy Minister has declared that gas needs to be part of the energy mix around the nation.

Both rating agencies are aware of one of the world’s most foremost gas reserve estimators, the US-based MHA Petroleum Consultants (now part of the giant Sproule group). MHA has declared that Victoria has substantial reserves of onshore gas that do not require fracking.

They are unique in the world and can provide water to grow carbon-absorbing vegetation. But some six wells need to be drilled to check permeability. The government does not want them drilled because of the huge reaction that will be spawned from Greens in the inner city ALP seats. Instead Victoria may import gas.

• Melbourne is the home of Australia’s best-ranked university and arguably the best events ­facilities.

If there is a major downgrading of Victoria’s credit rating the commonwealth will need to decide whether to try to save Victoria or simply allow the higher interest rates to force the state into a proper decision-making mode. That will involve severe spending cuts.

There are still two years until the state election. But there is a federal election in less than a year and if Victoria’s ratings are downgraded the situation could easily become a federal issue. Other states will want Victoria to suffer.

Victorians will hope the treasurer will be able to secure a debt road map from the rating agencies that keeps Victorian debt in investment grade territory and minimises any downgrade.

But it will be a monumental “achievement” if he can negotiate that and still retain the “train to nowhere” project.