The AFR has a series of quotes from Moody’s and Fitch this morning that helps clarify that Australia has more room to run up public debt. First Moody’s:
“To maintain the triple A rating we want to see the debt trajectory not rising very steeply from where it is now. And we don’t see that it’s necessary to have a severe austerity program in order to prevent that trajectory from going up…It’s true the government has found itself in a difficult position, particularly in an election year, and therefore it’s unlikely to take any offsetting measures.
On Australia’s long term prospects and the slow moving debate around how demographics will weigh on government revenue Moody’s said, “We’re not convinced of that yet.”
Fitch added:
“The debt ratio is not expected to rise, and that’s not necessarily inconsistent with a modest budget deficit.”
A few points. It is S&P that has been most severe on Australia in insisting on a surplus “across the cycle” to maintain the rating. That means that you have some leeway to run up debt on the basis of counter-cyclical spending but when things improve you’d better start cutting. Moody’s and Fitch are offering a bit more headroom.
But most important is that these chaps are still seeing current budget weakness resulting from terms of trade falls as cyclical. There is a significant danger that this is wrong. If China is committed to rebalancing just as commodity supply climbs then falls in the terms of trade are a structural shift and permanent. That will seriously hurt government revenues even as global growth recovers.
This sets us up for a shock when the agencies wake up to it.
If the agencies are rating AUD denominated sovereign debt of the Commonwealth, when will they wake up that as Guy Debelle(?) said “we can print as much as we like” (or similar).
The ratings agencies are almost a counter cyclical indicator based on their ratings of US banks in 2006.
They still seem to refuse to recognise the difference between a sovereign issuer of a currency that borrows in that currency (like Japan, US, Australia, UK) and a state or sovereign that uses a currency issued by a third party eg NSW, California, Italy, Spain, Portugal.
Risk of higher or lower return in real terms in another currency eg for a USD investor in Australian government bonds is another matter, as is real return after tax to a domestic investor in long term bonds of any sovereign but the solvency/repayment risk they claim to analyse and rate when doing ratings for eg AUD bonds issued by Australia (or other fiat currency issuers) is quite different.
Markets operate on a kind of hybrid principle somewhere between Keynesiam and Monetarism, whatever the truth really is.
HnH That’s a pretty astute summation……
Maybe Explorer but when we issue paper A$ willy nilly we are not getting money for nothing.
Clearly at this point we are already in trouble in the external account. Printing more at that stage would just send tyhe dollar to the basement. In terms of other currencies, and the buying power of the A$, we would get a whole lot less than would have been possible before the problem arose. Conversely our assets become commensurately cheaper to holders of alternative currencies.
Again the loans held by foreigners are effectively printed bits of paper already…just a larger denomination. Why would they accept bits of paper in payment that are just a different colour? To that extent they have already lost the money. relative to the value of other currencies and therefore to say that for a sovereign nation that can print a currency is different….but not much!