Moody's, S&P, Fitch warn future government, Senate on AAA
Jacob GreberSenior correspondent
Updated Jul 4, 2016 – 6.40pm, first published at 10.20am
Moody's, Standard & Poors, and Fitch Ratings have warned the next government and the Senate that Australia's AAA credit rating will be threatened if budget repair is derailed in the next parliament.
In an escalation of the budget stakes, all three ratings agencies expressed unease at Saturday's inconclusive election outcome, which escalates the potential for populist policy making, costly horse-trading for political support and further delays in the return to surplus.
S&P said the lack of a clear result had "decreased visibility" on the future of the budget and that regardless of who wins in coming days, the rating could be lowered if "parliamentary gridlock on the budget continues."
Moody's has joined the number of observers concerned about household indebtedness in Australia. Bloomberg
Moody's senior vice-president Marie Diron said she expected fiscal consolidation to remain a "key policy objective of the new government".
Ms Diron indicated that while short-term uncertainty about Saturday's election outcome hasn't triggered an immediate rethink on the credit rating, it would continue to watch closely for signs of further delays in restoring the surplus and curbing debt.
"The electoral outcome would affect the sovereign credit profile only if it changed broad policy priorities and the effectiveness of their implementation," she said.
Separately, Fitch Ratings said that political gridlock that leads to a sustained widening of the deficit would "put downward pressure on the rating, particularly if the economic environment deteriorates."
"The close contest could mean a fiscal outlook and set of policies significantly different to those set out in the FY2017 Budget, with negotiations potentially necessary to implement key policies," the agency said in a statement on Monday.
The last time Moody's removed the AAA rating was at the height of the "banana republic" crisis of 1986, a downgrade that underscored Australia's bleak economic prospects and helped galvanise bi-partisan support for significant parts of the Hawke/Keating government's economic and budget reforms of the era.
"Our credit rating must be hanging by a thread," said former Reserve Bank of Australia board member Warwick McKibbin, who described Saturday's election outcome as a triumph of self-interest over the national interest.
"The election outcome is clearly the worst possible outcome for the Australian economy. What distressed me was that so many politicians were very happy with the outcome. It is clear that self-interest rather than national interest now dominates politics and this bodes badly for the future of Australia."
The statement comes amid widespread speculation that the prospect of a hung parliament could severely hamstring the next government's ability to make difficult budget decisions that are needed to maintain the rating.
"It's not a good sign because it seems like we've gone full circle back to the 1980s," said AMP Capital economist Shane Oliver. "We've become a bit of a dumb country that can't control spending in ways that can be financed."
While Mr Oliver said he doubted that a downgrade would drive up the cost of borrowing, given the global demand for yield, it would almost certainly deliver a "blow to the national psyche."
Moody's warned after the May budget that the last government's inability to curb spending and weak income growth meant the country was facing even larger and longer-lasting deficits than was claimed by the Coalition.
It has also become increasingly outspoken about the fact that Australia's debt – while low by international standards – continues to rise faster than countries with lower ratings such as Finland and the United States.
Fitch, which has the same top-level rating for Australia, noted in April that general government debt to gross domestic product of 34.5 per cent in June 2015 was 8.9 percentage points below the average for AAA countries. In 2011, the difference stood at 27.1 percentage point.
Doubts about the rating amongst many market economists comes a week after agencies cut Britain's rank following the shock Brexit vote – underscoring the consequences of unexpected political events.
"At the very moment the country needs political stability, especially with what's going on overseas, we get exactly the opposite," said Angus Coote, executive director of Jamieson Coote Bonds, in a note sent ahead of Moody's statement.
"The ratings agencies are going to hate this."
Jacob Greber writes about politics, economics and business from Canberra. He has been a Washington correspondent and economics correspondent. Connect with Jacob on Twitter. Email Jacob at jgreber@afr.com
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