Credit rating agency Fitch has cut Australia’s rating to negative but isn’t taking Australia’s AAA credit rating away just yet.

In a statement released overnight it said Australia still deserved the highest rating it could give.

“The ‘AAA’ rating reflects the sovereign’s strong institutions and effective macroeconomic policy framework, which has supported a long record of stable economic growth prior to the current exogenous shock,” Fitch said.

It also gave Australia credit for curbing the spread of the virus. However, these measures (particularly government spending) came at a cost.

Gross government debt will rise from 41.9 per cent to 58.2 per cent by June 2021. Because of this Fitch said Australia’s top rating could be under threat depending on how long the downturn lasted.

“Government spending in response to the health and economic crisis will cause large fiscal deficits and a sharp increase in government debt/GDP,” the ratings agency said.

“While these measures have effectively curbed the spread of the virus, they also constrained household consumption and reduced business sentiment and investment.”

Fitch is predicting a 5 per cent contraction in 2020, with the biggest impact occurring in the second quarter.

The agency remained concerned about Australia’s high levels of household debt, which sits at 186.8 per cent of disposable income.

This is the highest among AAA rated nations and poses an economic and financial stability risk.

 

What does it all mean?

Theoretically a credit rating is just an opinion. And one stemming from a firm whose reputation took a hit during the GFC for its top ratings on mortgage securities which eventually collapsed and triggered the crisis.

Nevertheless, a downgrade would send a message that government bonds are riskier to invest in compared to other AAA rated nations.

The example of US treasury bonds shows a downgrade to AA is not the end of the world. These are still perceived as a safe haven after America lost its AAA rating in 2011.

However, the inability of America to earn it back shows how hard it is once it’s lost. Fitch’s statement today comes just six weeks after its peer S&P issued a similar warning about Australia’s economy and the Big 4 banks.

S&P’s warning was more doom and gloom than Fitch’s, with the rating agency saying at the time Australia was facing “a severe economic and fiscal shock” which would cause “a substantial deterioration of the government’s fiscal headroom at the ‘AAA’ rating level.”