Turnbull's coalition stands firm despite credit rating threats

AUSTRALIA'S ruling coalition breathed a collective sigh of relief when credit rating agencies decided not to downgrade the nation's AAA rating after its Mid-Year Economic and Fiscal Outlook report was released a week ago. Prime Minister Malcolm Turnbull's government remains hugely sensitive to the prospect of losing its top rating. Unfortunately for him, economists confidently predict that the country is going to be downgraded within the next year.

This is in line with a warning issued by the ratings agency, Standard and Poor's (S&P). It warned back in July: "There is a one-in-three chance that we could lower the rating within the next two years if we believe that Parliament is unlikely to legislate savings or revenue measures sufficient for the general government sector budget deficit to narrow materially and to be in a balanced position by the early 2020s." The mid-year estimates say that the Budget remains projected to return to surplus in 2020-21. But this projection has met with widespread scepticism. In fact, whether the balance is achieved or not will be decided by many factors, some well beyond the control of any government.

The larger question is why any government should care so much about the ratings agencies. In theory, a downgrade should mean that the government would have to pay more to borrow on global financial markets. But just look at what happened after Brexit. All three major agencies downgraded Britain's sovereign rating. That should have meant London having to pay more to borrow. In fact, market yields actually fell. Nor was this the first time this has happened. In September 2015, Japan was downgraded by S&P. But the interest rates for Japanese borrowings again fell at that time. In 2011, S&P cut the rating of US government bonds and the Obama administration was duly outraged. Markets took no notice.