It may be a world first.
The state is, of course, Victoria, and the former premier is Jeffrey Gibb Kennett. He does not name the ratings agencies, but the two agencies who rate Victorian debt are Standard and Poor’s and Moody’s.
Their combined global market capitalisation approaches $US200bn, so they are capable of paying enormous damages if they were to lose a class action.
Paradoxically, as Kennett’s advocacy of a class action was published in Melbourne’s Herald Sun newspaper, an Australian government minister offered Victoria hope.
Here is Kennett’s full statement on the class action:
“As for the ratings agencies who oversee Victoria’s economic management and debt, they are as liable as Red Dan (former Victorian premier Daniel Andrews).
“They have failed, as they did before, (in) the collapse of US company Enron. The people of Victoria should lodge a class action against them to recover some of the financial damage they allowed to occur.”
In the case of Enron, there were many class actions against agencies, but none of them yielded huge sums. A key hurdle for investors was establishing a direct link between Enron’s inflated ratings and their losses. Proving the agencies’ knowledge of Enron’s issues and their deliberate inaction proved difficult.
In the case of Victoria, unlike Enron, the over borrowing facts have been clearly known by the rating agencies and the question will be whether the agencies have any responsibilities to the Victorian public.
Next week the Victorian budget appears likely to start the process of trying to recover from that publicly known mess and the measures will need to be very severe or more and more cutbacks will be required.
Currently, Standard and Poor’s gives Victoria a credit rating in the AA bracket, which requires the state debt to be of “investment grade” with a “very strong capacity to meet financial commitments”.
Kennett says that rather than having a capacity to meet financial commitments, the Victorian government might have to borrow for part of its recurrent expenditure – ie paying for the services the state government has to provide “at a certain level of quality”.
Victoria has become “a basket case” again because it borrowed “so much money on infrastructure projects that were never tightly managed, over budget and years behind delivery”.
This “will adversely affect every other service provided by government, and cost opportunities for citizens”.
Kennett and his treasurer Alan Stockdale in the 1990s had to rescue Victoria from a similar crisis. He tells the rating agencies that think governments can tax their way to a high credit rating: “More tax will not reduce debt, it will only reduce our population of long-suffering citizens, who will seek refuge and greater opportunities elsewhere.”
If Kennett is right and Victoria can’t tax its way out of its mess, then for the rating agencies to give it an AA rating requires the Victorian government to slash expenditures on a massive scale, which is politically difficult to do.
Both ratings agencies entitled to believe that Victoria had a “very strong capacity to meet financial commitments”. However, to most people that capacity has for some time been in considerable doubt unless the Commonwealth was prepared to rescue Victorian citizens.
In my opinion one of the “B” rating classifications would have been more accurate.
For example, the BB rating Standard and Poor’s uses these words “less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions”. In my view, two or three years ago, such a description would have been very appropriate to Victoria.
It certainly is now.
An earlier rating downgrade would have forced the Victorian government to take the steps that it is now taking, which at that time would have been a lot easier and a lot less painful for citizens.
One of the signs that a group requires a severe rating downgrade is when it tries to deceive its stakeholders using methods that are blatantly obvious to the ratings agencies. .
Victoria spent $42m on a committee asked to determine whether the state had onshore gas reserves. But the government instructed the committee not to look where it knew Victoria had huge reserves that had been estimated by the best US gas estimators and which did not require fracking. These massive gas reserves are next to the Gippsland treatment plant and on the Australian pipeline network.
The rating agencies might argue that the state was entitled to an AA rating because of the gas reserves.
But politically, developing the gas is extremely difficult, and some six wells must be drilled to make sure the gas flows. The committee, of course, claimed there was no onshore gas likely in Victoria. So concealing its existence from the public and the local media.
But Victoria has more gas than Queensland, and suddenly a “white knight” has appeared in Canberra who might make it possible for Victoria to save itself.
Energy Minister Chris Bowen says Australia has no option but to use gas and declares that gas will play an important role filling the gap left by wind and solar, particularly as the energy source can be turned on and off at short notice.
He declares new supply will be needed. And Victoria has all the new supply that Australia needs, and it is low cost and sits on the pipeline network. It's dissolved in water that can be used to grow carbon storing plants. And Victoria desperately needs the money.
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For the first time in Australia’s history, a former premier has publicly advocated for the citizens of the state he once led to lodge a class action against ratings agencies to recover some of the financial damage allowed to occur under a later premier.