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This key factor is the trigger for a downgrade of Australia's credit rating

ADRIAN DENNIS/AFP/Getty Images

Standard and Poor’s, which has placed Australia’s AAA rating under negative watch, has clearly identified the strength of political determination to reduce government debt as the key factor on whether or not to downgrade the sovereign rating.

The negative watch came about after concerns about the size of Australia’s debt burden and political uncertainty after the July 2 election over a new government and whether or not the Senate will pass measures to cut spending.

“We believe that without strong fiscal policy decisions, material government deficits may persist delaying return to surplus,” Standard and Poor’s told a media briefing today.

The agency believes the high level of external debt requires strong government finances to mitigate potential risks.

In a briefing today, S&P analysts said a downgrade to AA+ would come: “If we believe that parliament is unlikely to narrow budget deficits to a balanced position by the early 2020s.”

Standard and Poor’s says it will continue to monitor the government’s ability to pass revenue and expenditure measures through both houses of parliament over the next six to 12 months.

The other factor is a further weakening of Australia’s external position.

On the other side, Standard and Poor’s says it would return Australia’s rating to a stable outlook if there are new measures sufficient to reduce budget deficits materially over the next few years.

This slide, from today’s briefing clearly shows where S&P wants to see an improvement from Australia:

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