S&P Global Ratings has warned the big banks are undermining Australia’s ability to hold on to its prized AAA rating.
In an exclusive interview with The Business, chief ratings officer Moritz Kraemer pointed to Australia’s massive level of external debt, rather than a housing price bubble or budget repair, as a the real sticking point in recent deliberations over the credit rating.
S&P kept the Government on tenterhooks for a week after the recent federal budget before reaffirming its top credit rating, despite rival agencies Moody’s and Fitch issuing statements almost immediately after the Treasurer’s speech.
“Through the banking system, Australia has accumulated a lot of external debt and that’s the result of many years of large external current account deficits,” Mr Kraemer said.
“Among the AAA rated — the top notch rated sovereigns, of which there are only 12 left in the world — Australia is the only country with a large external debt.
“Actually I will go further and say it’s the only AAA sovereign which has any net external debt. This is a clear outlier and a weakness of the credit profile of the country.”
Australian foreign debt last year surged through the $1 trillion mark, with most of it racked up by Australia’s banks on offshore wholesale credit markets to partly fund the real estate spending spree that has sent property prices surging in Sydney, Melbourne and Brisbane.
Mr Kraemer argued that in order to offset that, Australia needed a very strong government balance sheet.
“The global financial crisis taught us that a significant run up in debt puts economies and financial systems at risk,” he said.
Given Australia was one of the developed world’s most trade exposed nations — with most trade with just one country — Mr Kraemer said it needed to be prepared for downside shocks, such as a hard-landing in China.
Kraemer doubts government’s budget forecasts