S&P doubts Australia's budget forecasts, adding that bank debt is a big risk for the country's AAA credit rating

(Photo by Ezra Shaw/Getty Images)

S&P Global Ratings has cast doubts over Australia’s budget projections and warned that the Big Four banks are undermining the nation’s ability to hold on to its coveted top notch credit score.

The agencies chief ratings officer Moritz Kraemer in an interview with ABC News said he would be “positively surprised” if the the optimistic forecasts in last month’s federal budget came true.

S&P cut the outlook on Australia’s AAA credit rating to negative from stable last July. It warned the prospect of fiscal policy gridlock could thwart government attempts to rein in the budget deficit after an election result that gave the government a wafer-thin majority.

“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,” Kramer said in the interview.

“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 banks largely to blame. The lenders raised the cash from credit markets to fund a housing boom that has seen prices in Sydney double since 2009.

To offset the build up in debt, the country needed a strong government finances, Kraemer said.

The government projects the budget will return to surplus in the 2021 financial year after 12 consecutive years of shortfall.

However the forecast surplus relies heavily on a projected turnaround in revenue, not on a spending pullback.

“We would be positively surprised if the government’s projections really came true,” Kraemer said.

Australia has gone from being a net creditor to a net debtor since the 2008 crisis as the government upped spending to prevent an an end to the unbroken run of economic expansion.

The government is expecting further growth in the nation’s debt for some years before it peaks at $375.1 billion in 2018-19.

“The global financial crisis taught us that a significant run up in debt puts economies and financial systems at risk,” Kraemer said.

It is still within the control of authorities to engineer a soft landing for the housing market, he argued, and warned the nation needs to be prepared for a sharp slowdown in China, the country’s largest trading partner.

A China slowdown will hit the demand for and prices of commodities such as iron ore and ultimately hurt the economy.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at research.businessinsider.com.au.