The Government Is Struggling In The Senate But Australia's AAA Rating Is Safe

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Yesterday’s big political surprise was the inability of the Abbott Government to get the Senate to repeal the Carbon Tax.

In what now looks as a procedural issue, around the amendments that the Palmer United Party wanted to make and the need for one of them to emanate from the House of Representatives, another vote will be held next week.

But the failure of the Government, which this week has already lost a number of votes on the Senate floor, to be able to herd the new cross-bench Senators toward its policy agenda is a warning of a budget strategy at risk.

But global ratings agencies Standard and Poors, Moodys and Fitch are not concerned, according to The Australian this morning which says that the ratings agencies still believe the Government will get its own way.

It could end up being a heroic assumption based on what we have seen this week in the Senate but Craig Michaels, Standard & Poor’s associate director, told The Oz that he expects to see compromises and is not yet worried because, “(The fact) that most measures don’t kick in for two years does give some time for the political process to run its course without derailing the government’s medium-term fiscal agenda.”

Moodys vice-president Steven Hess echoed these comments and said Australia’s AAA rating is not at risk given:

“The Australian government has among the lowest levels of debt in relation to GDP of any advanced economy, and we do not consider that there is a risk to the AAA rating of the government resulting from a delay and/or alteration in the budget.”

Echoing Tony Abbott’s comments last week that it might take a while to get the Budget through, Hess said that Moodys believes that “ultimately” the budget will be passed.

Fitch agrees with its director of Asia-Pacific sovereign ratings Andrew Colquhoun, telling The Oz that “There is a lot of wrangling going on which is not unusual; you need to take a step back from the blow by blow of the debate and see what comes out of it.”

But in a sign that there could be a risk in time if the Senate retains its obstinate approach to the Government, he added somewhat sanguinely: “We think there is a strong cross-party and social consensus on the importance of fiscal ­consolidation and sustainability.”

Watching the PUP senators this week and listening to their rhetoric together with the crash in consumer sentiment since the Budget was released in early May, this could be an assumption that needs to be revisited.

Politics doesn’t often play a role in Australia’s financial markets. The dollar doesn’t usually care, nor do bond and stock traders. But the dysfunction in the Senate and the hardball being played just might change this.

Time will tell.

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