All the S&P 'bedwetters' need to calm down

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“Bedwetting” became the political jibe of choice this week as panic spread through Coalition ranks follow the government’s poor showing on the weekend.

And the political uncertainty of a potentially hung parliament spilled over into the financial sector today when Standard and Poor’s (S&P) placed Australia’s AAA rating on credit watch negative from its previously stable outlook.

The credit rating agency subsequently placed negative outlooks on Australia’s AAA-rated states, government agencies and the nation’s largest banks. But all the S&P bedwetters need to calm down. The sky is not going falling in. You shouldn’t be running for the hills or an underground bunker like a doomsday “prepper”.

The actions undertaken by S&P this afternoon are not surprising.

Ivan Colhoun, chief markets economists from the NAB, explains:

Flow-on ratings impacts are beginning with the ratings outlooks of the states of NSW, Victoria and the ACT (with implications for the debt of NSW Treasury Corporation, Treasury Corporation of Victoria and the ACT) also changed to negative outlook as no state entity can receive a higher rating than the Commonwealth of Australia.

The negative outlook does not automatically flow to other state and semi-government issuers that are already-rated AA. Separately, there remains uncertainty about whether S&P may downgrade Western Australia (currently negative outlook) by virtue of S&P’s assumption of even lower iron ore prices, reiterated today.

NAB Research expects the ratings outlook for Australia’s four major banks will likely also move to negative, given today’s move given the assessed high likelihood of extraordinary government support for the banks.

Here’s a snippet from the S&P report this afternoon that placed New South Wales, Victoria and the ACT on watch negative, following the same move on Australia’s sovereign rating.

“We cap our long-term rating, and hence the outlook.. because we don’t consider that any state or territory in Australia can maintain stronger credit characteristics than the sovereign in a stress scenario,” said S&P.

“This is because of the revenue-raising and expenditure responsibility arrangements between the states and the Commonwealth, where taxation powers are concentrated at the Commonwealth, while the states are responsible for the delivery of health and education services.

Following the move on Australia’s top-ranked states, Colhoun was also on the money when it came to the ratings outlook on Australia’s largest banks.

“The negative outlooks on these banks reflect our view that the ratings benefit from government support and that we would expect to downgrade these entities if we lower the long-term local currency sovereign credit rating on Australia,” said S&P.

So there you have it.

Ignore any hysterics on social media or other sources, including politicians. It’s not a surprise, nor the end of the world.

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