S&P fires first shot across bows – AAA rating placed on credit watch negative

Years of spending beyond our means has caught up with Australia today, with ratings agency Standard and Poor’s lowering Australia’s credit rating outlook to negative.

While Australia retains its prized AAA credit rating for now, it is a strong warning Australia could lose its coveted credit rating if our budget position fails to improve.

In a statement, Standards and Poor’s said, “There is a one-in-three chance that we could lower the rating within the next two years if we believe that parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s.”

One such improvement could be the grandfathering of negative gearing and the reduction of the capital gains discount from 50 per cent to 25 per cent, forecast to save tax-payers over $6 billion a year.

Standard and Poor’s later today placed NSW, Victoria and the ACT on a negative outlook indicating “no state entity can receive a higher rating than the Commonwealth of Australia.”

Subsequently, for similar reasons our big four banks – ANZ, CBA, WBC and NAB were placed on a negative outlook.

S&P remarked, “The negative outlooks on these banks reflect our view that the ratings benefit from government support and that we would expect to downgrade these entities if we lower the long-term local currency sovereign credit rating on Australia”

S&P described government debt as low, but indicated its biggest concern is Australia’s “high external and household indebtedness”.

“A portion of Australia’s external debt has also funded a surge in unproductive household borrowing for housing during the 1990s and 2000s.”

Australia has the highest level of household debt as a percentage of GDP in the world. Approximately 30 per cent of bank funding comes from external wholesale markets, exposing Australia to external shocks.

Ireland was in a similar situation pre GFC with low government debt and significantly high household debt. When the Irish people could no longer service their mounting debts, the banking system buckled, the government was forced to bail out them out, effectively shifting the household debt onto the balance sheet of the government.

» Australian Government, major bank credit ratings put on negative watch by Standard & Poor’s – The ABC, 7th July 2016.




46 Comments

  1. > … “high external and household indebtedness”.

    but but but but… How many clowns/economists and treasurers alike told us all this time that household indebtedness doesn’t matter – only goverment does… and even that…

    And now – it suddently does!

    I feel so betrayed!

  2. Ino, I think you will find that they were right… Household debt didn’t matter at that time….

    It only matters when you can’t pay it back!!. With all our jobs going and as we enter the 2nd year of a prolonged income recession, that time has come.

  3. @Pete: So what you’re telling me is that these people are no more intelligent than a 2 year old who thinks that by closing their eyes they suddenly make you dissappear or make themselves invisible.

    It’s like going to the doctor with an ingrown toenail and the doctor prescribing you a pair of comfy clown shoes – 10 numbers too big, telling you to come back when your leg needs to be amputated.

    What happened to foresight? Why did this matter in the past long gone now, and why did it suddenly stop mattering recently?

    And just for the record I was being sarcastic when I said “I feel so betrayed”

  4. “Voting gives people the idea that their vote can effect a positive change in the system when the facts show that the system is rigged.”

  5. Every politician knows the knock on effect of a worsening credit rating.

    This is another pristine example of how the morons in Canberra, particularly big spending Labor, are running this country into the ground. Their lack of effort in reigning in the deficit will cost us more dollars many fold over.

  6. How the hell is Labor running the country into the ground? They haven’t been in government for 3 years…pls explain.

  7. “Over time , whoever controls the money system , controls the nation.” Stephen Zarlenga

  8. The whole business model for credit ratings is dodgy. What could go wrong with companies paying ratings agencies to rate them?

    I wouldn’t be surprised if it was shown that creditors were influencing ratings agencies to push down the ratings for governments they have lent to.

  9. Why we heed the assessments of corrupt ratings agencies says a lot about who controls the country’s finances. These political tentacles of the global banks were largely responsible for the sub prime crisis by rating crap mortgages (CDOs) as AAA+ which lead to the collapse of the world’s financial system. Either way there is nothing Australia can do to alter its fate at the hands of the international central banking cartels. If you do not have large debts and lead a simple life you have nothing to worry about.

  10. Ah, so the AAA ratings at threat levels….

    The right wingers saying the end of the world

    The left wingers saying it’s fine

    Of course, the realists are say, we can ride for a bit, but if this is what it’s like as housing and stock markets rise/remain steady, then what the hell is it going to be like at the next down turn.

    Strap in people, the next economic bump is going to destroy a whole heap of ‘wealth’…. it never existed of course, people just think it did.

    You’ve had the longest period in history to prepare for this: Don’t get caught on the wrong side of the lender/debtor ledger.

  11. Don’t worry Matty. Malcolm Turnbull has just invited every primary school aged child in China into Australia as long as their parents/guardians can afford the housing. A few hundred thousand to a million should soak up that glut developing in the apartment market in the three big cities and keep the property bubble inflated.

    Meanwhile the idiot voter complains about congestion in traffic and on public transport and the poor state of the hospital system.

    Just have a look at the senate results (so far).
    http://www.abc.net.au/news/federal-election-2016/results/senate/
    The Arts Party polled higher than the Sustainable Australia Party in Queensland and New South Wales. People whine about poor infrastructure, but if it is a choice between fixing that problem or stopping a correction in property values, property wins hands down.

  12. @13

    While what you say has plenty of merit, mathematics say you can only manipulate a market for so long, especially a debt fuelled market, before fundamentals rule supreme.

    Otherwise how were all the property prices around the world falling in the GFC when governments were hell bent on propping them up?

    The smart ones are the ones who have flogged all their RE for top dollar and hiding in the fringes.

    this is totally unsustainable economically and socially. Another 3 years of what’s going on in Europe and most countries will have closed their borders.

    All hell IS going to break loose.

  13. Matty,

    Yep it will bust at some point.

    In the mean time, how’s that pricing of risk in the bond markets working out?

    https://www.youtube.com/watch?v=CLQsT9BPHpg&feature=youtu.be&t=21m18s

    Ratings agencies are pointless. Either the market ignores them or they drop the rating after the crash has occurred. Their primary roll is to extract additional rent for some bondholders or keep the suckers in the game while those in the know are exiting.

  14. @ Matty & David C

    I agree a bust is on the horizon, but when?

    I thought the downturn late last year & early this year was a sign of things to come, then came a .25% rate reduction & despite banks tightening lending criteria, stamp duty increases for foreign purchasers, prices have taken off again (in Sydney anyway). Add to that the primary school kid visa scam & any further abatement in prices seems a way off.

    I wonder what other treats are in store to prop up prices when the next few tangible signs of a
    weakening market become apparent?….100% cgt discount for foreigners only?…public executions of the ATO staff employed to pursue illegal foreign property purchases broadcast in China?

  15. Antony has a good point. Yes, I agree a big bubble is forming, but let not underestimate the self-perpetuating nature of it. There too much vested interest. I would not be surprised if they heavily increased immigration and loosened overseas investment rules in order to keep the whole juggernaut rolling on…

  16. Property is king in this country, and those who invest well are held up as a shining examples of great Australians. Just about every day I’m reading stories of people who invested 1 year ago and doubled their money, or about the 30yo who already has 50+ investment properties. Yeah that’s great. Let take down the altar at StMary’s Cathedral and replace it with photos of these people so we can bow down and worship them each week. God forbid you should actual get your hands dirty and do something productive, like manufacturing. Just do your part to inflate the property bubble even higher. Lets create a country for our children where an average house costs $3mill and the only thing we make is beds for Chinese tourists.

  17. Congratulations Australia for voting the LP/NP party to stay in power. Instead of punishing them out of office you have given approval for any party to overthrow the PM whenever it choses to. You have officially marked the end of democracy. Choosing a PM by the people is only symbolic now and you have given powers to a small minority of people, namely parliament, to decide from now on. We are well on the road to totalitarianism. Once again congratulations Australia

  18. @Theo
    In Australia we vote for a member of parliament for our electorate to represent the people of that area. We do not vote for party leader or President, never have. You might emotionally think you do but that is not how our system of voting works. It has always and still is up to the winning party MPs to select their leader who then goes onto be PM. Various parties have changed leader over time, it’s not something new. We still have democracy. It would have been on step toward totalitarianism if Labor had won – who do not even want the people to vote on important matters.

  19. WTF-You do have a point. However, when a small minority of people(parliament) decide in the end to disregard the majority’s people’s choice of PM and install someone they like, parliament becomes nothing more than a ‘clique’. Also, who says we should have a parliament? Who came up with that bright idea? Democracy is what the people decide not parliament. One vote means one vote, not this deliberately complicated self-made mess and infatuation with seats. Politicians decided to create an institution that is basically ‘jobs for the boys’. They do nothing productive but instead divide us. You do know the political institution is the most corrupt of all institutions in any society? The recent elections proved more so than ever. Instead of punishing parliament for going against the wishes of the people, the voter patted them on the back saying its ok for you, to decide for me who is best for me. This is not democracy. At least Labor was punished for doing such a thing. I would seriously question my beliefs as a LP/NP voter considering they are all for being liberal, idealists, democracy, freedom especially patriotism but seriously undermine democracy and Australia by allowing the LP/NP party to go unpunished.

  20. The shock may now be just geographical, take a 7.2 earthquake in the wrong place, ie China.

    It’s now mainstream media. The system is broke and everybody is running to stocks. Which are about to crash in the US under its own weight of panic. Earnings are down EVERYWHERE.
    The future generations are basically fucked and really, we ate just waiting for the boomers to die or cash out in which ever order/both. Let’s admit it. Or crash….

    Call me dramatic, but this either becomes a “Red Flag” event or it’s a controlled crash where only the young hostess up the back survives. It ain’t gonna be pretty and it’s starting…

  21. Patrick I like your plane crash analogy. Unfortunately the reality is that the Pilots (1%+Bankers) will survive and the rest will become a statistic. So assume the impact position, head between knees and kiss your arses goodbye as the outcome won’t be pretty.

  22. @24 Can you shed some light on how you see that China red flag or the like is starting? Please.

  23. I don’t know who writes this stuff.

    Referring to quarterly median figures per suburb as an indication of value direction.

    If you ever look at quarterly median figures for a suburb you’ll notice that its practically useless as a price difference indicator due to such a low sample set of data.

    One quarter its up by 35% the next its down by 40%.

    http://www.msn.com/en-au/news/australia/house-prices-surge-in-sydney-and-melbourne/ar-BBuGKL6?li=AAgfYrC&ocid=iehp

  24. @Bubby,

    That doesn’t stop the agents whacking on $50k to the asking prices in the hope of reinforcing the precedent of those few sales that reflect the higher prices in the previous quarter.

    I don’t know who or why people are prepared to pay over the odds & exacerbate the whole situation?

  25. @28 Antony

    ‘those’ people you speak of are simply normal human beings who have been sucked into a bubble. It’s classic bubble behaviour, on any level, any metric, any ratio, housing is a disaster in this country, unless you look at price rises over the last 15 years. Only when focussing on price does it make any kind of sense to buy in, but the real metrics and ratios, the ones that justify the price, just don’t make sense.

    It’s a bubble, all in it’s way will feel the blast when it pops. Some are saying it has started, and while not getting my hopes up, I think this time it is going to burst, unless there’s more government intervention.

  26. It looks like we’re going to get another interest rate cut. We’ve got deflation in consumer prices and inflation in asset prices, so what do we do… cut the interest rate for property purchases.

    This is classic debt deflation. The overwhelming debt held in property is causing deflation everywhere else. What the politicians don’t seem to realise is that this cannot go on forever.

    Over capacity caused by a lack of demand, and the resulting deflation in the non-property sectors, increases unemployment. You cannot continue to support a housing bubble in a high unemployment environment. For example, investors cannot claim negative gearing when they’re unemployed, and people who were renting and are now unemployed find a couch to sleep on.

  27. Yeah more interest rate fiddling on the way which seems to directly stimulate real estate more than anything else in the economy.

  28. Jas2u-Mass strikes in China? Where is the corrupt and hypocritical media in the West to report on this? or the massive human rights violations that goes unreported everyday there? It seems China is exempt from criticism because it is a major trading partner. IF it were a minor one it would have been subject to sanctions and bans. It seems our politicians here are just as biased as well as selective as they like to be. Spreading the wealth is not a priority in China especially for a supposedly Communist country. The country is however, the mirror for Australia’s future very soon as we here are also not sharing and spreading the country’s wealth. Our resources are literally ‘stolen’ by a select few thanks to the corrupt politicians they have bought by largely funding their elections campaigns. However, the biggest thanks should be given to the voters who still support these same politicians. Good one Aussie.

  29. @30

    David, you’re rationale makes perfect sense to me. Do you think the RBA may also be aware of implications of the points you make & potentially decide to not cut rates as a result?

  30. Anthony, the RBA only have one tool. As the saying goes, when all you have is a hammer, everything looks like a nail. But yes I agree they will be conflicted.

  31. RBA have cut again.

    No doubt it will cause more frenzied buying to continue and even increase in Sydney.

  32. @41

    That’s why Turbull was up in arms that banks only passed on about 1/2 the rate cut.

    Interesting how banks used other 1/2 to bolster term deposit rates. Liquidity issues? Don’t want to expedite crash? Don’t know. Anyone care to speculate?

  33. Is this it – is this how our bubble will fail and many will realise they have paid too much?

    I have seen so many “no deposit” home loans – I wonder if people realise how much trouble they could be in.

    I have no debt, some savings and am in no hurry to buy.

    2018-2020 is when I will look – if I ever do buy.

  34. @42

    The big 4 have always had a liquidity problem because of their size (3 in the top 10 global banks) compered to the Australian economy. As they cannot raise enough funds here they have to borrow 40% offshore. This will of course end in tears when their major asset base of real estate loses at least 50% of its value and foreign banks will no longer lend to them.

  35. “When the Irish people could no longer service their mounting debts, the banking system buckled, the government was forced to bail out them out, effectively shifting the household debt onto the balance sheet of the government.”
    Correction: when the banks business model failed the govt was tricked into bailing all the banks out …. banks took the people’s pension funds and the IMF refused a haircut. NOT the people. the BANKS got bail out. APRA has lobbied and the Govt has legislated for BAIL-INS in Australia plus the 250K guarantee. Banks are creating the massive credit bubble.
    Takes 9$ debt to get 1$ value… China take 6$ debt for the same product.
    Antony could be related to their fear of loss of external borrowing. Need to keep our money in their coffers for a bail in.

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