Wry & Dry

Australia's AAA credit rating threat a bank problem

Mrs W&D and this year's Treasurer have something in common: both are promising a 'tough budget'.

Whereas W&D listens carefully to Mrs W&D, who is listening to the Treasurer?  Or indeed any politician?  Instead, W&D is listening to the rumblings about a possible cut to Australia's AAA credit rating.  Okay, okay, it's on page one of this morning's Financial Review.

But what the Financial Review, or other journals, does not pick up is the effect that a credit rating cut will have on Australian banks.  Hence on mortgage lending rates.  Ka boom!

Work with W&D on this.  Australia's 'credit rating' is critical, as it is an independent assessment of the ability of Australia to pay its debt to the world.  And as our debt keeps increasing, because of successive governments' largesse, the credit rating becomes more and more important.  

If the credit rating falls, then the cost to we-the-taxpayer of our government borrowing overseas increases.  As the interest cost increases, so our budget deficit increases.  Hence the newspaper talk.

And W&D notes that three critical factors used to determine our credit rating are worse now than they were when we last lost our AAA credit rating under Hawke/ Keating.

AAA

But this is not the key point.  The key point is that Australian banks' major source of funds for home lending is overseas borrowing.  Australian banks' credit rating depends upon Australia's sovereign rating, because of the implicit (and explicit) guarantee that the government has given to Australian banks.

A credit rating cut for Australia will cascade to the banks.  This will mean an increase in the banks' cost of funds and hence an increase in home loan mortgage rates.  Oh dear.