In this article, we address frequently asked questions from market participants about how a potential sovereign rating downgrade would affect our ratings on Australia’s states and territories. In July 2016, S&P Global Ratings revised to negative from stable its outlooks on the ‘AAA’ rated State of New South Wales, State of Victoria, and Government of Australian Capital Territory after a similar action on the Commonwealth of Australia (see “Australia Outlook Revised To Negative On Growing Fiscal Vulnerabilities; ‘AAA/A-1+’ Ratings Affirmed,” published on July 6, 2016).
A one-notch sovereign downgrade on Australia would not affect all of its states and territories equally. In fact, such an occurrence would only affect the states and territories with ‘AAA’ long-term foreign currency ratings. In the event of a sovereign default, the economies and finances of those states and territories would be likely to deteriorate in line with the Australian sovereign. S&P Global Ratings would not downgrade the states and territories with long-term foreign currency ratings of ‘AA+’ or lower in the event of a one-notch sovereign downgrade to ‘AA+’.
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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.
