Australia’s AAA credit rating at risk following cliff-hanger election

Australia’s trek to the polls on Saturday has resulted in a nail biting, too close to call result. At the conclusion of counting at 2am Sunday morning, the ALP had 67 seats, LNP – 65 and the minor parties have picked up five. 13 seats remain in doubt with counting to resume on Tuesday.

The results suggest Australia could be heading for a hung parliament and three years of political deadlock for economic reform and attempts to rein in spending.

Such a deadlock could spell the end of Australia’s coveted AAA credit rating with speculation Australia could be put on credit watch negative within weeks.

The consequent loss of the triple AAA credit rating will not only make government debt more expensive, but it will result in a spate of downgrades for Australian banks and companies and potentially result in the rise of mortgage rates due to banks over reliance of wholesale funding. The downgrade will also be a blow to confidence.

Australia’s total debt surges to 254 per cent of GDP

The loss of our AAA credit rating was going to eventually happen, regardless of the outcome of the election. There has been speculation looming about the loss for months.

An Australian Bureau of Statistics (ABS) release last Thursday tallied another record high for Australian debt levels. Total debt racked up by households, the public sector and business (but excluding finance companies) totaled 254 per cent of GDP for the first quarter to March.

Households’ insatiable appetite for a slice of the Australian housing bubble, and at any cost, made the largest contribution to total debt levels at 125 per cent of GDP. Australian households remain the most indebted in the world as a percentage of GDP. A significant risk is our big banks’ reliance on overseas wholesale funding to support the residential mortgage market. As the world increasingly questions the Australian miracle and recalculates risk, the spreads of this wholesale funding will increase.

According to the Courier Mail, analyst, John Steiner from United States based Hedgeye Risk Management has recommended investors short Australia’s big four banks. He believes the housing oversupply and falling demand has signaled Australia’s housing market is in a bubble and is about to blow.

Business debt now sits at 84 per cent of GDP, while Government debt ticks up to 47 per cent of GDP.

Earlier this year when total debt was only 243 per cent of GDP, Morgan Stanley calculated for every dollar of extra GDP growth, Australia accumulated an extra $9 worth of debt. At the time, Daniel Blake, a Sydney based economist for Morgan Stanley said Australia needs to urgently find other sources of growth that are less debt-intensive rather than the hugely leveraged property market.

“We’re not getting that much growth for the money we’re borrowing,”

» Australia’s debt levels hit record high as households, businesses and governments load up – The Courier Mail, 30th June 2016.

» Australia’s debt problem looks worse than China’s, says Morgan Stanley – The Australian Financial Review, 4th July 2016.


  1. The way I see it is our big four are insolvent if overseas funding disappears. For example, if we wake up one Monday to find Wall st closed indefinitely because someone worked out the sum of the bond markets and negative interest rates.

    We are heading for a reset.

  2. I’m new here so please go easy on me…

    # 1 It seems to me that household debt is way to high in Australia but that government debt on infrastructure is too low given economic conditions. Wouldn’t an increase in government spending on infrastructure improve the economy?

    # 2 The whole idea of a government credit rating seems like a scam because Australia prints its own currency. Why can’t Australia buy its own bonds? The government could set the interest rate on its own bonds and then buy them.

    # 3 Allowing investors to buy Australian bonds seems like a massive and unnecessary give-away to private investors.

    What am I missing?

  3. Excuse my French but “La classe politique”, the 2 major parties have so decimated the middle class with failed policies and corruption that they have created a “Precariat class” that will continue to savage them until they have an alternative to vote for. The class structure of Australia is splitting into the “Have nots against the have yachts” with only credit supporting the dreams of those at the bottom. Global class warfare has now reached Oz with the supposed Trickle Down Theory of economics turning into Pee On The Poor. This election was the wake-up call for the 1% running this country for their own benefit.

  4. I was overseas in 2011, the AU$ was buying US$1.12 for most of my time. I could have doubled my money if I bought US$ then and sold now.

    The problem I see is the big 4 and others have borrowed US$, a lot at the high rate and are now hoping they don’t have to pay back at todays exchange rate.
    Suddenly $100m is worth $65m or less (ramp that up to the billions borrowed), the shortfall has to come from somewhere and bail in seems to be a catch word.

    Those that own their house and have more than one income stream will be OK in the main, but if it goes bad (Greece/Cyprus bad) owners will suffer, and those hocked to the hilt will suffer loss of nearly everything.

  5. @ Bradley

    What you say is correct, but! The aussie currency (like all world currency ATM) is FIAT, just printed paper with nothing but the government promising to pay out on it (it really just means as long as there is faith in the government being able to tax and control the population, then the dollar is fine).

    But as it’s purely faith backed (we believe the governments promise) if it prints too much, too quick we loose faith in the ability of the government to pay it’s bonds, leading to rapid inflation. So think of it like an argyle diamond. There’s billions of them there, but if they hit the market too quick, people will work out they’re nothing special and their value falls. so you trickle them out as fast as the market can take without collapsing….that’s how the elite pump debt into the system, as fast as it can take without collapse, except they ALWAYS get too greedy, and debt is required to pay interest, then the system fails.

    The fact that government and company bonds are yeilding -ve dictates that a massive, massive economic collapse is guaranteed. 2009 was just a warm up. In 2009 it was individuals and companies going broke, this time it is going to be central banks and governments….. Think it was bad when 1 million a month in usa loose their job and hit social security? Imagine what happens when 50 million don’t get their social security and have NO INCOME AT ALL….. Horror movie stuff.

    As for government infrastructure, the governments have proved they are useless at running any form of infrastructure program, public or private. All that happens is small business and individuals pay even more tax for badly designed and over budget programs…. Government spending is not the answer. At all. On any level. but the guys who loan the government money have tricked almost everyone to believe it’s the answer.

    Treat your personal finances as though you were one of the elite and you’ll be ok. ie. no non-productive debt, only hard assets and income streams that are recession proof.

    As for point #3, now you’re getting it. Read the book, the creature from jeckyll island. It will answer everything you’re asking. No, they’re not silly questions, they’re just questions very few ever think of. The rich own the whole economic system, the central banks and governments. But! the rapid decline in the faith in politics (starting in the middle east, now sweeping Europe, USA and Australia) is what happens when democracy gets too debt saddled, and is the peoples response to breaking free.

    Be under no illusion, Trump, Brexit, Hung parliaments etc. are directly attributable to the economic situation of the people. Will be interesting to see how the elite manage the next few years.

    Remember, even after the most prosperous time in history (since world war II until now) only 4% of Australian’s are able to retire financially independent of the government. That means 96% of people are living their lives completely wrong. 96%! It’s simply mind blowing.

    The government love people on pensions, it’s SOOOOO EASY to get their vote!

  6. @Matty
    Thanks for that. I’ve got a few more beliefs that I’ve been told (by my betters) are just nuts:

    # 1 Inflation is not an issue in Australia right now, evidenced by the ridiculously low cash rate being set by the RBA.

    # 2 The RBA is working at cross purposes because the ridiculously low cash rate inflates house prices leaving home buyers with less disposable income, thus putting a drag on the economy. Yet the stated goal of the ridiculously low cash rate is to spur economic activity.

    # 3 The only possible way to let the air out of the housing bubble is to make mortgages harder to get. Legislating a tightening of mortgage lending criteria by increasing downpayment size or changing the income to loan ratio would make mortgages safer and put downward pressure on house prices.

    # 4 If the AAA bond rating really is important, it is the perceived ability to pay the bonds that determines the rating. An economy where workers have enough income to pay for shelter along with OTHER goods and services (i.e. a growing economy) will ensure the ability to pay those bonds.

    # 5 Finally, only when governments do not collect the required taxes to pay for the goods and services that the citizens demand does borrowing become a necessity. Collecting the revenue needed to pay for these services eliminates the need to borrow. Perhaps Gina Rinehart and other multi-billionaire Australians should be paying more in tax.

  7. @ Matty said:
    “Treat your personal finances as though you were one of the elite and you’ll be ok. ie. no non-productive debt, only hard assets and income streams that are recession proof.”

    Could you please expand on this? What is an example of “non-productive debt”? And “hard assets? Do you mean land (with not debt against it) and gold?

  8. One more thing…
    I was watching internet news and I came across a video clip with two economic advisors for the presidential candidate Bernie Sanders. This twenty minute interview with Bill Black and Stephanie Kelton suggests that government debt on productive assets and/or jobs programs can boost economic growth and employment. In the end such a stimulus would increase Australia’s ability to pay its bonds.


    Real News “Time for a New Deal Jobs Program”

  9. # 1 Inflation is not an issue in Australia right now, evidenced by the ridiculously low cash rate being set by the RBA.

    That’s consumer inflation. Asset price inflation is another thing. This is why the RBA cash rate is a “blunt instrument”. There needs to be some mechanism to set the interest rates differently for different sectors of the economy. Banks already do it to a certain extent with different rates on business loans, personal loans and home loans.

    The RBA needs to be able to penalise the commercial banks that are not lending in a balanced way.

  10. @David C

    Agreed. Good point about asset price inflation.

    As I mentioned in # 3, one mechanism for limiting the amount of lending that goes into the residential housing sector is to tighten the criteria for mortgage lending. Legislating 30% of the purchase price of a home as a downpayment is just one example of how to prevent an over-allocation of capital to the housing sector of the economy. This type of regulation doesn’t penalise banks for misallocating money, it is a restriction designed to prevent that misallocation from happening in the first place. There must be other regulations that would work in a more targeted way than simply raising and lowering the cash rate to spur or slow the economy.

    Your point is well taken.

  11. @James

    non-productive debt is stuff like car loans, huge PPOR loans, loans for holidays etc. Productive debt is stuff like the debt you take on to expanded a successful business, well managed stock portfolio etc.

    Hard-assets are those that aren’t reliant on a whole host of variables being favourable just to make the asset worth while. So at present, housing is not a hard asset. Things I call hard assets are things like viable and recession businesses, precious metals, valuable art, cars, etc. Things that will hold value when the going gets rough.

    Two of the greatest lies of the current times are:
    A: Your home is an asset: It is an asset, just not to you, its and asset to the bank until paid for in full.
    B: You super is an asset: Again, just not to you. It’s listed as an asset for the government when they present their financials…. So either they borrow against your super….or they will allow the bond holders to take you super if the government defaults… Oh hell.

    This is why I say try to be sovereign in your own right. thinking that the government, your super or anything else will look after you is plain deluded.

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