S&P thanks AAA tax-payer for supporting banks

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The nation’s media is busy celebrating today because Australia’s major banks are seen to be of top five quality worldwide by S&P. Here is the chart causing the celebration:

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Nice! But, as always, the message coming from the credit ratings agency was a little less glowing under the surface and and here it is:

Sovereign credit-worthiness dependency for systemically-important Australian financial institutions
We note that a one-notch lowering of the issuer credit rating of the four Australian major banks to ‘A+’ from ‘AA-‘, all other rating factors remaining equal and unchanged, would occur if our local currency issuer credit ratings on The Commonwealth of Australia were lowered to ‘AA+’ from ‘AAA’. This concurrent rating action on the banks would reflect our view that the government’s repayment capacity would be slightly lower (but still extremely strong) at the ‘AA+’ rating level in the unlikely event that it was required to provide extraordinary support to systemically important banks. Considering our rating outlook on The Commonwealth of Australia is stable, however, we currently believe this potential rating scenario is unlikely.

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And, if you think the private sector is on the hook for the risks then think again:

…the potential move by the Australian government toward an alternate resolution regime being one that embraces a concept of senior creditor bail-in–which we believe is by no means a foregone conclusion and may not be imminent because of other regulatory developments that are likely to be more proximate and higher priority–could sit uncomfortably with Standard & Poor’s current “highly supportive” assessment of the Australian government toward the domestic banking sector. This could result in us changing our views concerning government support, which, in turn, could be accompanied by downgrades of “systemically important” Australian banks.

In short, make ’em private, they’ll be downgraded. Make ’em part private, they’ll be downgraded. Downgrade yourself, they’ll be downgraded. It’s you, dear tax-payer, that S&P loves.

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I note in passing that the pro-cyclical nature of ratings is as obvious as ever in the chart with all the globe’s current major housing bubbles in the highly rated green section. I would lay odds that it won’t be that way when this cycle ends.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.