Australia’s AAA credit rating

Australia has managed to hold its ‘AAA’ credit rating, despite the negative outlook on its review in July 2016 (http://www.tradingeconomics.com/australia/rating). The agencies that decide on the credit ratings have given Australia a chance to make evident the possibility of a budget surplus by 2021 before the credit rating is downgraded to an ‘AA’ standard. But what does the credit rating even mean? and how does the credit rating actually effect us?

What is the credit rating?

The credit rating is basically a ranking system going from AAA as the best to C at the worst, it shows the likely hood that the investor will get paid back on the money they put into loans and other investments. ie, AAA credit rating means it’s a very low-risk investment. The credit rating is decided by three agencies who access all investment credit ratings, the agencies include Standard & Poor, Moody, and Fitch; if you know much about the 2008 GFC, then you’ll recognize that these were the guys who gave bad investments good ratings, playing one of the major roles in bringing about the GFC.

How does it affect us?

A lower credit rating means that investments in Australia are more risky,  resulting in Australia having to set higher interest rate for investors as a result of the increased ‘risk factor’. In other words, Aus must pay more money back to investors, resulting in us having less money to spend for ourselves. This will most likely mean less Government spending which, as we all know, means less access to those handy public goods, including healthcare, education, defense, roads and all that great stuff.

What is Australia doing about it?

The government has supposedly planned a path for us to get back to budget surplus by 2021, that is if everything goes well, there are many doubts about us actually achieving this goal. The 2017 budget saw some changes which reflect this idea including the new levy on banks and medicare, as well as cuts in university funding.

What do you think about these changes? What other changes might come in the future? Will we make it back into surplus by 2021?

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7 Comments

  1. While it would obviously be bad if we were to loose our AAA Credit Rating, it’s worth noting that we are one of only 12 countries in the world with a AAA Credit Rating, and if we were to drop a grade we would join countries such as the UK, the US, France and the European Union, all massive global commodity players considered to be highly stable investments. It might sound bad, and it’s certainly bad press, but it’s unlikely to affect net investment into Australia.

    Liked by 2 people

    1. Generally, a lower credit rating means we have to issue our bonds at a higher returns rate. While not instantly crippling, it will increase the interest that we have to pay every year and this cost can build up. Instead of 4% bonds, we may have to issue them at 4.5% or even 5% to make sure we raise the funds we need.

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  2. The triple-A rating is probably really going to matter as a public relations matter, and any serious investors would probably understand that Australia as a whole is a worthwhile investment. The only issue that could arise from it is uninformed investors panicking, but even that would probably only have short-term consequences.

    Liked by 1 person

    1. I agree. I think maintaining strong foreign relationships is really important for foreign trade, and would prevent economic hardship in the future.

      Liked by 1 person

  3. A good credit rating would result in more foreign investments, while good in the short term, it could lead to crippling debt as we struggle to pay back the interest to foreign investors.

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