Standard and Poor’sAustralia – one of only 12 countries with a AAA credit rating – risks a ratings downgrade for the first time since 1989, US investment bank Goldman Sachs has warned, saying the country could be hit with a “negative outlook” within months.
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Goldman Sachs made the assessment in a research note released on Wednesday afternoon, saying that credit ratings agency Standard and Poors could make the decision due to Australia’s “poor fiscal performance”.

Even a “negative outlook” – a first step to an actual downgrade – will have consequences, said Goldman Sachs.

Australia’s public debt burden “remains favourable”, said Goldman Sachs. However, plummeting commodity prices, falling terms of trade, weak economic growth and political impasse had stripped $283 billion out of the budget over forward estimates in the past 30 months, with a further $55 billion deterioration likely in the May budget.

Standard and Poor’s had recently updated their ratings methodology, said Goldman Sachs, and given this new criteria “it is possible that Australia will be put on a “negative ratings outlook” over the coming months (from “stable”).

“Such a shift implies, by definition, that a formal ratings downgrade over the subsequent two-year period is a one-in-three chance”.

Australia maintained a AAA credit rating until 1986 but it declined over the next three years to AA negative. It then slowly clawed its way back to a AAA rating in 2003, and has stayed there since.

Other countries sharing a AAA rating include Canada, the UK, northern European countries like Germany and Denmark, and Hong Kong and Singapore. Six countries are the next level, AA+, including the United States and Austria.

A decision by S&P to cut Australia’s sovereign rating would probably also lead to a downgrade of the big banks, Goldman said. The four largest lenders are currently at AA-, three levels below the federal government.

A downgrade is also likely to weigh on the Australian dollar, which Goldman sees falling to US67¢ over the next 12 months.

Goldman Sachs also warned that most of the information value is delivered through negative credit warnings – rather than the actual ratings changes themselves. “Even if Australia maintains a AAA rating, a move to a “negative” outlook would be likely to be more important for financial markets than any subsequent shift to AA+”.

As well, business and consumer confidence would be further damaged, which could weigh on sentiment and borrowing and give the Reserve Bank another headwind to confront.

Sovereign yields on government bonds would rise 11.7 basis points if there was a negative outlook revision and the Australian dollar would lose a “few percentage points”, said Goldman Sachs.

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