S&P has raised the prospect of a downgrade of Australia's triple A rating again

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Standard & Poor’s, which last year put Australia on a negative outlook for its sovereign rating, today issued a note to explain the impact on the states of any downgrade of Australia’s AAA rating.

The agency say a one-notch sovereign downgrade to AA+ would only affect the states and territories with AAA long-term foreign currency ratings.

So far S&P is the only ratings agency with Australia on negative watch. Moody’s Investors Service last month reaffirmed Australia’s AAA rating and stable outlook, saying the the country’s future is underpinned by economic resilience in an uncertain world.

However, an article published by S&P, titled The Link Between Australian Sovereign And State Ratings, addresses frequently asked questions about the impact on the states of a sovereign downgrade.

S&P Global Ratings says it would not downgrade the states and territories with long-term foreign currency ratings of ‘AA+’ or lower in the event of a sovereign downgrade.

New South Wales, Victoria and the Australian Capital Territory have AAA ratings.

“If we were to lower our rating on the Australian sovereign by one notch, then it would not automatically affect the State of Queensland (‘AA+’), State of Western Australia (‘AA+’), State of South Australia (‘AA’), or State of Tasmania (‘AA+’),” says S&P analyst Anthony Walker.

“This is because their credit ratings are lower than the Australian sovereign and already incorporate our view that their credit quality is slightly lower than that of the sovereign.”

S&P Global Ratings in July last revised to negative from stable its outlooks on AAA rated New South Wales, Victoria, and ACT after a similar action on Australia.

“The negative outlooks reflect our view that no state or territory in Australia would likely withstand economic conditions that result in a sovereign default better than the Australian sovereign,” says Walker.

“This is because we think states and territories’ economies and finances are likely to deteriorate in line with the Australian sovereign during conditions that result in a sovereign default.

“The states and territories’ own source revenues would likely deteriorate during a challenging economic environment, and they are financially reliant on grants from the central government to fund core public services.”

S&P says points at that its article on the impact on the states is not a rating action.

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