From Deutsche:
The first question to ask is which credit rating are we talking about? In the first instance we think the pressure will be on the foreign currency rating, not the local currency rating, although we cannot rule out agencies simultaneously acting on both. It is quite common for countries to have a foreign currency rating that is below the domestic rating, for quite sensible reasons in our view. In Australia’s case S&P first assigned an explicit local rating to the sovereign on 27 July 1992. The rating was AAA, even though the foreign currency rating at the time was only AA. Moody’s introduced a local currency rating for Australia in 1999, again at Aaa and again despite the fact the foreign currency rating was two notches lower (at Aa2).
The second question is does this distinction matter for the semis and banks? We think it does. Indeed, in S&P’s criteria the bank ratings are explicitly linked to the local currency sovereign rating not the foreign. According to the agency’s criteria, a downgrade of a sovereign local currency rating from AAA to AA+, for instance, would likely result in a one notch downgrade to the rating on banks that are “highly likely” to receive sovereign support and have a standalone rating of “A” (all else equal). This should be the case for the four Australian major banks, which benefit from a two notch rating uplift from their stand alone rating, reflecting their systemic importance. A downgrade would apply to the banks’ local and foreign currency ratings, in our view. Therefore, a downgrade to Australia’s local currency sovereign rating to AA+ by S&P would likely result in a downgrade of the major banks ratings to A+ from AA- currently. However, a downgrade in the foreign currency sovereign rating alone by S&P need not have any impact on either the local or foreign currency ratings of the banks.
