From the AFR:
Standard & Poor’s has warned that Australia’s AAA rating could be vulnerable in five years if the credit ratings agency doubts the government’s commitment to restoring the surplus, national debt keeps rising and the economy fails to self-correct.
In the short term, S&P has pledged that the rating is secure because net debt is relatively low and the government has stressed its willingness to adopt prudent fiscal policies in spite of confirming a deficit for this year.
Craig Michaels, an associate director at S&P in Melbourne who is one of the analysts overseeing Australia’s rating, said that was not the case in the near term and the rating could withstand even a string of deficits.
But taking a medium-term view, the risk of a downgrade depended on whether the government could sufficiently convince the ratings house that it could nurse the economy back to health and its debt remained under control.
…“At the same time, if persistent budget deficits cause net general government debt to rise significantly, the fiscal weakness is compounded. This does not have to lead to a rating change on the sovereign if weaknesses elsewhere – particularly Australia’s weak external attributes – improve to offset fiscal slippage.
So, either the current account deficit is fixed or they want public surpluses to support the banks’ funding of the current account deficit. Of course, there’s an irony here. With Australia’s current tax incentives, the lower interest rates created by public surpluses by definition grow the current account deficit via excessive property speculation and over-consumption. But I guess its not up S&P to point out how to fix our problems, just that they exist.
The five year timeline is clearly based upon the scenario that any fiscal instability will be slow and low level, as S&P argued yesterday. The probability is that it will be much more precipitous as the terms of trade continue to slide and we go over the mining investment cliff.
