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Australia Credit Rating Update

With the prospect of further political instability in both the lower and upper houses of parliament, the credit rating agencies may finally lose patience and place the Australia’s ‘AAA’ credit rating under formal review.

Both major parties are in the process of negotiating with the minor parties and independents in the wake of Saturday’s knife edge result and as a result, Australia’s deficit is more likely to widen than narrow. The prospect of budget positive measures (yet to enacted) such as the reigning in high-end superannuation concessions along with the proposed $14 billion of cuts may now be under threat.

Australia has been warned repeatedly in recent times regarding the criteria required to retain the ‘AAA’ credit rating.

Australia’s loss of the ‘AAA’ credit rating would also likely have a knock on effect to the credit ratings of the State Governments. The downgrade would also threaten the two notch upgrade from the Stand Alone Credit Rating (SACR) given to the four major banks. This is provided on the basis of the Australian Government’s support to the Australian banking system.

The ‘AA-’ senior credit rating of the four major banks is achieved by adding two notches to the SACP credit rating of ‘A’. Therefore, a loss of one of these levels of support would see the major banks senior credit rating downgraded to A+. However, it should be noted this is still relatively high in a global sense.

Finally, it is worth reminding investors that the credit rating of Basel III compliant Additional Tier 1 hybrids and subordinated debt (tier 2) is dependent upon the SACP (not the senior credit rating), so any increase in capital via the increase in common equity (CET1) is a positive for these securities as the level of capital support will increase.