Australia Gets ‘Extreme’ Warning

If you missed it earlier this week, fresh off the IMF’s warnings (which we discussed here), ratings agency Standard & Poors (S&P) has joined them issuing us with a dire warning on our debt exposure.  S&P’s warned our debt, both public and private, has hit “extreme” levels and puts us in the unenviable position as one of the worst in the world.  In their words:

“Australia would have one of the weakest external positions of the 130 sovereigns that we rate.”

As we have reported previously, Australia’s net foreign debt has surpassed the trillion dollar mark at $1.045 trillion, up from $976b in just the 12 months to June.

The implications are numerous.  S&P’s warning joins both Fitch and Moody’s ratings agencies that we are on our final warning on our AAA ratings.  You need to understand that losing that rating is not a slap on the wrist but has the dual effect of automatically increasing the cost of servicing that mammoth debt bill but also a larger potential issue of capital withdrawal on a loss of faith in our economy as a safe haven.

S&P also draw a clear comparison between us and Spain.  Like us Spain borrowed heavily in the domestic housing market which, like us, saw soaring property prices and a general misconception that debt doesn’t matter when it’s in housing, as many ‘learned’ commentators will offer when dismissing our title of worlds highest personal debt to GDP.  We don’t need to tell you how that worked out for Spain (really really badly if you don’t.  They are the S in the notorious Euro basket case ‘PIGS’).

S&P call such investment ‘unproductive’.  Whilst they didn’t discuss it we remind you that our total national debt is now just over $6 trillion.  In the last 5 years that has risen $2 trillion, a 50% increase.  Over that same period our actual GDP growth was around $350 billion.  In other words it’s taken nearly $6 of debt to generate $1 of economic activity.

Can you see now why they are worried?  It doesn’t make us particularly different to other countries but that ratio is about double that of the US which attracts most of the tutt tutting.

What frustrates all of this is our treasurer in the very same week S&P’s issue this warning was telling an audience at the IMF & World Bank that:

"There is not an economy in the G20 or other wise that would not want to be Australia at the moment and would not want to have the strong financial and banking system that ensures that we can have the resilience to ensure we underpin jobs and growth in this country,"

S&P bluntly rebutted this:

“The government will point out that its fiscal position is strong — but it’s not quite as strong as it used to be….And you don’t want to have your fiscal situation adding fuel to the fire on the external side.”

i.e. get your act together Australian government or you will lose that coveted AAA.