26 Dec 2016
Australia’s hold on its AAA credit rating is under pressure after Standard & Poor’s (S&P) moved the country’s sovereign rating from ‘stable outlook’ to ‘negative outlook’. There have long been fears the country’s persistent budget deficits would drive a downgrade, but for S&P the recent Federal election tipped the scales—the rating agency expressed grave doubts about the re-elected government’s ability to legislate sufficient savings or revenue measures.
Australia now has a 1 in 3 chance of being downgraded within the next 2 years, but in our view a downgrade would have little material impact on the price of government bonds, or its borrowing costs. It would instead be the country’s major banks that would be impacted.
Westpac, CBA, NAB and ANZ have already seen their S&P ratings shift from AA- stable, to AA- negative as they risk losing one of their two notches of rating uplift that stems from the government’s support.
The move was widely anticipated, major bank credit spreads only modestly underperformed in the days following the negative outlook shift. But the widening will continue if they’re eventually downgraded.
Since the announcement both the Australian dollar and the big banks’ share prices have strengthened, and the government’s ten-year bond yield has remained at all-time lows.