AAA - What You Won’t Hear Today

You’d have to be living under a rock not to have heard or seen the headlines about Australia potentially losing its AAA credit rating.  At midday today our Treasurer releases a mid year budget review that many tip will see an even bigger Government deficit and debt pile.

Already being on negative watch we then run the very real risk of losing our AAA rating accordingly.  What will likely ensue today is just a whole lot of political mud throwing and focus on government debt.  Whilst that government debt and fiscal performance is no doubt the cause for the potential downgrade, it is the personal debt that doesn’t seem to be getting the attention it deserves, and could be the biggest effect. 

We don’t hear enough in mainstream media about the fact that Australia has the highest personal debt to GDP in the world.  We also don’t hear enough that we have now over $1 trillion in foreign sourced debt.  Whilst our government debt to GDP is modest by most western standards, it is the personal debt that should be front and centre of this AAA downgrade talk.  A downgrade sees a loss of confidence and increase in the cost of all that foreign debt.  That then flows through to loans on our already strung out property market where last week we saw declines in price growth and indeed price losses in many markets.  This coincides with falling rental yields and all time historically low wage growth.  So to point out the obvious in that equation, prices rises have stalled or negative (particularly in apartments) in some markets, interest costs will be going up, and income (servicing that debt) is reducing or stalling….

The fact remains we as a nation have borrowed far more than we have produced with that debt.  As we reported here (when S&P issued their last warning):

“…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.”

The AAA credit rating loss could be the start of a wakeup call that has been coming for some time.  You will probably hear today that other major economies don’t have a AAA rating but they may forget to mention they have nowhere near the personal debt nor ‘all in’ bet on their property market like we do.  In the short term they can print money to service their higher government debt, but we don’t know many mums and dads who have a money printing press or tree.