Former RBA man monsters S&P

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There is really is no stopping the politico-housing complex. Former assistant governor at the Reserve Bank of Australia and noted curmudgeon, Stephen Grenville, has a red hot go at S&P today:

Just in case you’re getting lulled into complacency, S&P concludes with some warnings and a line-in-the-sand threat:

We could lower the ratings if external imbalances were to grow significantly more than we currently expect, either because the terms of trade deteriorates quickly and markedly, or the banking sector’s cost of external funding increases sharply. Such an external shock could lead to a protracted deterioration in the fiscal balance and the public debt burden. It could also lead us to reassess Australia’s contingent fiscal risks from its financial sector. We could also lower the ratings if significantly weaker than expected budget performance leads to net general government debt rising above 30 per cent of GDP.

What would a country have to do to get a clean bill of health? Australia’s banks are no longer obtaining new funding flows from overseas, and their outstanding balances are smaller than in 2008.

Sure they are but where will they be in two years with credit growth now outstripping deposit growth, Stephen? In terms of the ratio to GDP, the bottom is in and its headed back up:

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It’s quite clear that Australia is releveraging offshore. Back to Grenville:

What about the ‘line in the sand’ on net government debt?

With the current level at just over 20 per cent of GDP, it would indeed be a major slippage if we were to find ourselves over 30 per cent, so for S&P to finish its press release with this hypothetical outlier is drawing a long bow. It’s drama-queen stuff, but it has been picked up by the press, always happy to spotlight an impending disaster, no matter how unlikely.

How unlikely is it when the next global business cycle ends? The last one saw the net debt ratio climb 20% from late 2008 to 2011. Looks pretty bloody likely to me!

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Grenville exposes his hollow arguments in the end by concluding with an ad hominem:

Could it be that S&P is peeved because it recently lost its reputation-damning court case in Australia? It’s little wonder that analysis of the sort produced by S&P for Australia evokes a derisive response. Can’t they do better?

The derisive response that Grenville points to is from Bernard Keane and Glenn Dyer at Crikey, two guys that mean well but aren’t often cited as authorities on balances of payment (being extravagantly kind) in global markets.

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It’s ironic that Grenville is attacking S&P for not doing its job. Pointing to Australia’s rising external vulnerability and questioning whether it is appropriate for a AAA sovereign rating is exactly what it didn’t do for various current account deficit nations in the lead up to their getting smashed in 2008.

What Grenville really means to say is that he doesn’t like them doing their job.

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.