Australia’s Sovereign Risk: Banks Have Been Consistently Cautious

The main rating agencies have so far been unanimous in their credit opinion of the Australia Government; they have all assigned the equivalent of a AAA risk rating. However, due to the political deadlock following last weekend’s election, S&P have put Australia on Negative Outlook, while Moody’s and Fitch have warned that they are also becoming increasingly cautious.

The electoral issue is a catalyst but the underlying problem is the Australian budget position. In 2009 the Government predicted a budget surplus by 2013; that date has now been pushed out to 2021 as a result of commodity price weakness. Against this economic backdrop, global banks have been cautious on Australia since late last year, with the CBC* remaining steady. Banks were similarly cautious on the UK Government and downgraded it two months before the EU referendum. Credit Benchmark data is increasingly suggesting that, in the eyes of the banks, not all AAA-equivalent ratings are equally stable or reliable.

*CBC = Credit Benchmark Consensus; a 21-category scale which is explicitly linked to probability of default estimates sourced from major banks. A CBC of bbb+ is broadly comparable with BBB+ from S&P and Fitch or Baa1 from Moody’s.