The Times Australia
Business and Money
The Times Real Estate

.

Australia’s credit rating is irrelevant. Ignore it

  • Written by Steven Hail, Lecturer in Economics, University of Adelaide

Australia guards its AAA credit rating with care. Successive governments from both sides of politics have framed federal budgets with one eye on the economy and the other on what ratings agencies such as Standard and Poor’s will do.

Just the announcement of a “negative outlook[1]” as happened in April[2], makes news.

Politicians, commentators and even some economists, treat even the possibility of a downgrade as a big deal.

What is unclear is why.

Credit ratings are supposed to measure the risk of default by corporations and governments on the bonds they issue to investors.

If it’s a ten-year bond, it’s the risk of not making the remaining annual payments and not paying back the sum that was lent after ten years.

A ratings downgrade is meant to indicate the payments have become less likely.

Read more: The government has just sold $15 billion of 31-year bonds. But what actually is a bond?[3]

This should make bond holders less keen to own the bonds, which should push up the rates[4] the corporation or government will have to offer to sell them.

A very good reason to pay attention to Standard and Poor’s you might imagine.

And it is for the governments of states such as Victoria and NSW whose ratings were downgraded[5] on Monday.

Ratings agencies can’t hurt the Commonwealth

Those states will probably have to pay more for their borrowings, even though the Reserve Bank of Australia is in the market snapping up state[6] as well as Commonwealth bonds.

Australia’s credit rating is irrelevant. Ignore it Australia owes money in a currency it prints. Nerthuz/Shuttersrtock

But the Commonwealth of Australia is different.

Research to be published next year[7] by University of Adelaide graduate student Matthew Crocker suggests that the Commonwealth and other governments with a high degree of monetary sovereignty including those of the United States, Japan, Canada, New Zealand, Korea, Switzerland, Norway and the United Kingdom are well placed to ignore Standard and Poor’s and all the other ratings agencies.

Governments have a high degree of monetary sovereignty if, like Australia’s, they issue and collect taxes and borrow in their own currency and if that currency is on neither a gold standard or a fixed exchange rate.

In a careful study of members of the Organisation for Economic Cooperation and Development between 2000 and 2020, Crocker finds that ratings downgrades do indeed push up the cost of borrowing for countries without monetary sovereignty (such as most members of the Euro-zone), but have no significant impact on the cost of borrowing for monetary sovereigns such as Australia.

Lenders know this well

One lesson from this is that the Australian government should ignore credit ratings when framing its budgets, as modern monetary theorists[8] have been saying for years.

Since 2004[9] Australia has only issued bonds in Australian dollars[10], which is another way of saying it has only borrowed in a currency it is able to create.

Although there are many constraints on what governments such as Australia’s can do (including the risk of inflation) such governments can’t become insolvent in their own currencies, because they are always able to supply them.

Strictly speaking, they don’t need to borrow at all. They choose to do so. Where they do borrow, their lenders face a zero risk of default[11].

Read more: Explainer: what is modern monetary theory?[12]

The other lesson is that buyers of bonds understand this. They behave as if there is a zero risk of default, whatever the agencies say.

Those that didn’t, including fund managers who bet against Japanese and US government bonds in anticipation of downgrades, lost an awful lot of money.

The implications are important

It would be great if others understood this. It has implications for the balance between fiscal and monetary policy, for federal-state financial relations and for privatisations and public investments.

Australia’s credit rating is irrelevant. Ignore it Pressure to privatise. JAMES ROSS/AAP

Governments at both levels have borrowed more than A$100 billion to fund measures to fight the recession. It won’t limit what the federal government is able to do down the track, but it might limit what the states can do.

In order to fund the extra debt payments those states will be under pressure to outsource and privatise things that aren’t yet privatised, even though on one estimate none[13] of Australia’s privatisations over the past 30 years has ended up benefiting the public.

The pressure will increase if the states are downgraded and the cost of their payments increase.

The Reserve Bank is buying state and territory bonds, but that doesn’t write the debt off, it only kicks it down the road.

The best thing would be for the federal government to take-over states’ COVID-related debts. It can’t run out of dollars, and the states are doing much of its work for it, supporting the economy. The move would make the ratings agencies even less relevant.

Reserve Bank Governor Philip Lowe was half right[14] when he said in August

I think preserving the credit ratings is not particularly important; what’s important is that we use the public balance sheet in a time of crisis to create jobs for people

Credit ratings aren’t important for the federal government. Right now they matter for the states. The Feds are able to help them out.

References

  1. ^ negative outlook (www.indiatoday.in)
  2. ^ April (www.spglobal.com)
  3. ^ The government has just sold $15 billion of 31-year bonds. But what actually is a bond? (theconversation.com)
  4. ^ push up the rates (www.rba.gov.au)
  5. ^ downgraded (www.afr.com)
  6. ^ state (theconversation.com)
  7. ^ next year (cdn.theconversation.com)
  8. ^ modern monetary theorists (theconversation.com)
  9. ^ 2004 (www.aofm.gov.au)
  10. ^ Australian dollars (www.aofm.gov.au)
  11. ^ zero risk of default (www.pgmcapital.com)
  12. ^ Explainer: what is modern monetary theory? (theconversation.com)
  13. ^ none (johnquiggin.com)
  14. ^ half right (parlinfo.aph.gov.au)

Authors: Steven Hail, Lecturer in Economics, University of Adelaide

Read more https://theconversation.com/australias-credit-rating-is-irrelevant-ignore-it-151579

SME Business News

Albanese government looking to acquire Rex Airlines if buyer can’t be found

The Albanese government will on Wednesday announce it is willing, as a last resort, to purchase the collapsed Rex Airlines, in its latest bid to prop up aviation services to regional and remo...

The Legal Battle Against IP Theft: What Businesses Need to Know

So you've formulated that million-dollar idea and you're ready to take your business to the next level. You were so excited to publicize your supposedly next big thing that you went on TikTok...

Top 20 SEO and Guest Post Services in Wyoming Helping Brands Expand Their Reach

Today’s business needs to have strong online visibility to grow and reach more customers. Guest post services and SEO services make it easier for the brand to rank higher on their search engine...

Everything You Need to Know About PLR Digital Products to Resell for Maximum Passive Income

In the ever-evolving digital product world, the concept of Private Label Rights (PLR) has emerged as a lucrative opportunity for entrepreneurs who aim to generate passive income. PLR digital prod...

The Times Features

What’s the difference between wholemeal and wholegrain bread? Not a whole lot

If you head to the shops to buy bread, you’ll face a variety of different options. But it can be hard to work out the difference between all the types on sale. For instance...

Expert Tips for Planning Home Electrical Upgrades in Australia

Home electrical systems in Australia are quite intricate and require careful handling. Safety and efficiency determine the functionality of these systems, and it's critical to ...

Floor Tiling: Choosing the Right Tiles for Every Room

Choosing floor tiles is more than just grabbing the first design that catches your eye at the showroom. You need to think about how the floor tiling option will fit into your spa...

Exploring Family Caravans: Your Ultimate Guide to Mobile Living and Travel

Australia is the land of vast horizons, spectacular coastlines, and a never-ending adventure. As landscapes and adventures vary across the country, Voyager will route you, carava...

Energy-Efficient Homes in Geelong: How a Local Electrician Can Help You Save Money

Rising energy bills don’t have to be the new normal. With Victoria’s energy prices up 25% last year, Geelong homeowners are fighting back and winning, by partnering with licenced...

Eating disorders don’t just affect teen girls. The risk may go up around pregnancy and menopause too

Eating disorders impact more than 1.1 million people in Australia[1], representing 4.5% of the population. These disorders include binge eating disorder, bulimia nervosa, and...

Business Times

Albanese government looking to acquire Rex Airlines if buyer can’…

The Albanese government will on Wednesday announce it is willing, as a last resort, to purchase the collapsed Rex Airline...

The Legal Battle Against IP Theft: What Businesses Need to Know

So you've formulated that million-dollar idea and you're ready to take your business to the next level. You were so excit...

Top 20 SEO and Guest Post Services in Wyoming Helping Brands Expa…

Today’s business needs to have strong online visibility to grow and reach more customers. Guest post services and SEO servi...

LayBy Shopping