FED:S&P loses a friend as US loses its AAA

AAP General News (Australia)
08-12-2011
FED:S&P loses a friend as US loses its AAA

By Colin Brinsden, AAP Economics Correspondent

CANBERRA, Aug 12 AAP - An analysis by the International Monetary Fund (IMF) back in
April suggested shocks in the US economy should no longer be a worry to Australia as it
is now more tied to Asia.

Hmmm, really?

Obviously, that theory needs some tweaking after the events of the past week or so.

Perhaps throwing in the world's largest economy losing its AAA rating for the first
time in its history may offer a different conclusion.

After all, who in their wildest dreams just a few months ago would have thought that
the US would lose its top-tier credit rating from one of the world's biggest rating agencies
- Standard & Poor's.

Sure, S&P stuffed up by a trillion dollars or so in its US downgrading analysis, but
it was more a case of the agency pointing out the failures of the US political process
that left the world dangling for weeks as Congress fought over a debt plan to avoid default.

Understandably US President Barack Obama was not impressed.

"No matter what some agency may say, we have always been and always will be a triple
A country," the president fired back.

He went on to quote US investor extraordinaire Warren Buffett, who believes S&P was
not only wrong to downgrade the US to AA-plus, but says the country was worthy of a "quadruple-A
rating".

Buffett was not the only person to create a new level of rating.

According to Treasurer Wayne Swan, Australia has a "gold-plated" AAA credit rating,
which is "safe and secure".

"It's been recently affirmed and we are widely considered to be in the top tier, even
among the exclusive club of developed economies in the world to share the highest rating,"

Swan said.

Obviously, there are no permutations of AAA - gold-plated, titanium reinforced, pink-diamond
encrusted, or otherwise.

The treasurer was merely just trying to emphasise that the budget position in Australia
couldn't be more different from the US, and many other advanced economies come to that.

And it's worth comparing our predicted debt levels to calm the concerns of those worrywarts
who just can't resist mentioning Australia in the same breath as say Greece.

Australia's net debt is forecast to be 7.2 per cent of gross domestic product (GDP)
in 2011/12 and 6.7 per cent in 2012/13.

In the starkest of contrasts, Greece's net debt for this year is expected to be 125
per cent of GDP - yes, larger than the economy itself - rising to 130 per cent in 2012.

Italy, a country that has been grabbing the limelight for all the wrong reasons, is
around 100 per cent of GDP in both years.

Even the European stalwarts of France (79 and 81 per cent) and Germany (almost 55 per
cent in both years) would no doubt leave peniaphobics (those fearing poverty) suffering
sleepless nights.

And among the world's big guns, Japan's net debt balloons to 135 per cent of GDP in
2012 after 128 per cent this year, while in US it's over 72 per cent in 2011 and nearly
77 per cent in 2012.

Before we start getting too smug, we did have a negative net debt position of 3.8 per
cent of GDP in 2007/08, and our gross debt ceiling is now $250 billion, up from $75 billion
in the same timeframe.

Should the budget position deteriorate, or it was perceived we could no longer pay
our way in the world, the said gold-plating would quickly melt away, although we are a
long way from that.

The decision by S&P to cut the US rating from AAA, where it has stood since it was
first rated in 1945, was not unexpected.

But other global agencies, Moody's Investors Service and Fitch Ratings, confirmed their
triple-A rating equivalents after a Congress deal was finally struck, even though it didn't
live up to expectations.

S&P's decision, announced after Wall Street had closed on Friday, sent a shockwave
across global sharemarkets on Monday.

It prompted investors to flee to traditional safe havens such as gold, the Swiss franc,
and, ironically, the US dollar and US Treasuries - suggesting the US downgrade is not
the end of the world.

Not that the ratings agencies themselves always get it right.

And according to outgoing Commonwealth Bank CEO Ralph Norris, they are "always a bit
late to the party".

"Ratings agencies haven't really covered themselves in glory over the last decade or
so, with what actually led to the financial crisis," Norris said in his last press conference
in charge of the country's biggest bank this week.

These are the same guys that were happily doling out AAA ratings for those extremely
complex financial instruments that no-one really understood, but supported mortgages that
were given to Americans who couldn't afford them and resulted in the GFC when they couldn't
pay.

The "sub" in "sub-prime" may have been a giveaway that they weren't really worthy of AAA.

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