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Moody's says Australia is doing brill. AAA rating safe amid strong finances.; But S&P says Australia is on the same path as Spain
Topic Started: 13 Jun 2012, 12:08 PM (6,392 Views)
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Moody's strips France of AAA-rating with one-notch cut

By Jean-Baptiste Vey and Daniel Bases
PARIS/NEW YORK | Mon Nov 19, 2012 7:31pm EST

(Reuters) - Moody's stripped France of its prized triple-A badge on Monday, cutting the sovereign credit rating on Europe's No. 2 economy by one notch to Aa1 from Aaa, citing an uncertain fiscal outlook and deteriorating economy.

The downgrade, which follows a cut by Standard & Poor's in January, was widely expected but is still a blow to Socialist President Francois Hollande as he strives to convince the world he can fix France's public finances and stalled economy.

Moody's said it was keeping a negative outlook on France due to structural challenges and a "sustained loss of competitiveness" in the country, where business leaders blame high labor charges for flagging exports.

"The first driver underlying Moody's one-notch downgrade of France's sovereign rating is the risk to economic growth, and therefore to the government's finances, posed by the country's persistent structural economic challenges," Moody's said.

"These include the rigidities in labor and services markets, and low levels of innovation, which continue to drive France's gradual but sustained loss of competitiveness and the gradual erosion of its export-oriented industrial base."

Finance Minister Pierre Moscovici told Reuters the downgrade was a motivation for the 6-month-old Socialist government to pursue reforms, but he noted that even after the S&P downgrade French debt has enjoyed record low yields.

He also said the government was committed to meeting its target of cutting the public debt to 3 percent of economic output next year from an estimated 4.5 percent this year.

The euro slid against the U.S. dollar after the downgrade, by 0.30 percent from nearly a 2-week high to $1.2770, even though analysts said the downgrade was largely factored into bond markets.

The S&P downgrade had little impact on French yields, which have been trading at record lows of just over 2 percent in recent weeks despite the concern about France's sickly economy.

"There is probably more downside until the knee jerk reaction is out of the way. But on the whole it seems likely that this more reflects an existing reality than new information for the market," said Steven Englander, global head of G10 FX strategy at Citi.

REFORMS AHEAD

Moody's had been waiting to examine Hollande's 2013 budget and his response to a review of industrial competitiveness before adjusting its view on France as a sovereign lender.

Standard & Poor's has rated France AA-plus, with a negative outlook, since downgrading it by one notch in January. Fitch Ratings still has France at AAA, also with a negative outlook.

The loss of its Aaa rating from two agencies poses a problem for France, as investment funds often require their best assets to have at least two top notch ratings to remain in their portfolios.

Any rise in borrowing costs will be painful as the French government is already battling to rein in its deficit with potentially painful cuts to public spending.

"France is paying the price for not engaging in reform," said Axel Merk, president of Merk Investments in Palo Alto, California, saying he was not surprised by the downgrade.

With France's 2 trillion euro economy teetering on the brink of recession, Hollande surprised many this month by unveiling measures to spur industrial competitiveness, chief among them the granting of 20 billion euros in annual tax relief to companies, equivalent to a 6 percent cut in labor costs.

The government had already announced 30 billion euros in budget savings next year in an effort to meet its deficit goal and is working on reforms to labor laws to enable companies to hire and fire more easily with economic swings.

French bond yields are close to record lows of just over 2 percent, nearly one percentage point lower than at the time of the S&P downgrade, allowing France to roll over its debt for free, in inflation-adjusted terms.

Analysts expect a limit to any automatic selling by investors whose mandate only allows them to hold AAA bonds.

"The amount of index-driven selling would be near zero. France is fair value relative to other euro-area sovereigns," Morgan Stanley, a primary dealer, wrote in a report last week.

(Additional reporting by Jean-Baptiste Vey, Daniel Flynn and Leigh Thomas in Paris and David Gaffen in New York; Writing by Catherine Bremer; Editing by Richard Chang)

Read more: http://www.reuters.com/article/2012/11/20/us-france-moodys-idUSBRE8AI17K20121120
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Australia poised to keep AAA credit rating: Moody's

19 Apr, 1:59 PM

The increasing likelihood of years of federal budget deficits is unlikely to see Australia's top credit rating downgraded, according to The Australian.

The newspaper reported that Moody's considered "the risk of a negative rating action to be relatively low despite the Commonwealth budget remaining in deficit for longer than targeted".

"Australia has among the lowest government debt levels in the world, especially at the Commonwealth level, but even if you throw in the debt of the states and local entities it remains low on a comparative basis," Steven Hess, Moody's sovereign analyst for Australia, said.

Yesterday, ANZ Bank said prospects of a budget surplus in the next four years were slim unless the government makes deep spending cuts or the currency drops sharply.

The bank's analysts predicted deficits of $17 billion this financial year and $7.4 billion in 2013-14.

Some analysts predict a deficit of $12 billion to $15 billion, against the official mid-year forecast of a $1.1 billion surplus.

Read more: http://www.businessspectator.com.au/news/2013/4/19/australian-news/australia-poised-keep-aaa-credit-rating-moodys
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Andrew Judd
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How can the institutional financial strength of Australia be high if the big 4 are levered 63 times to their capital base??

What part of this am i getting so muddled up on?

On the face of it a few percent fall in house prices is going to mean that the banks will have to by recapitalised by shareholders or the government. er.....i think they need to make losses first since loan assets are not altered by fallling house prices. However you would think that there would be a capital adequacy adjustment by some method as risk increases on the assets.
Edited by Andrew Judd, 21 Apr 2013, 10:08 AM.
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Hooray, we might lose the AAA

Alan Kohler
5 hours ago

The headlines this morning declare that Australia’s AAA credit rating is “under threat”. Actually they should say something like: “Hooray, the AAA yoke might be thrown off”.

Being one of only eight countries with the highest credit rating and a stable outlook is one reason Australia’s manufacturing industry is being killed by a high currency: the shortage of AAA bonds globally boosts our investment inflow.

One way to get the currency down and stimulate the economy would be to keep stimulating the economy with government spending until the AAA rating is lost. Growth would be boosted twice.

I’m half joking. Well, maybe just a quarter joking.

In any case there is very little actual threat to Australia’s AAA rating, unfortunately. The headlines on this morning’s stories quoting S&P associate director Craig Michaels could just as easily have focused on his other statement that Australia’s credit rating is not under threat from the current situation of small and declining deficits, even if they extend to 2016-17.

The AAA rating would only be lost sometime in the future if there were “no intention” of returning to surplus, which there is. So the “AAA rating under threat” story is an old-fashioned beat-up designed to boost S&P’s tattered credibility as the investors’ guardian, but that doesn’t mean the budget is in good shape – it’s not.

The cash deficit for 2012-13 will be something north of $20 billion rather than the $1.1 billion surplus forecast six months ago in the Mid Year Economic and Fiscal Outlook and the $1.5 billion forecast in last year’s budget.

From that starting point, a surplus for 2013-14 is now impossible, as both political parties have acknowledged. In his sixth and final budget Wayne Swan will bring down a deficit of $10-15 billion, saying: “it’s not my fault - the terms of trade made me do it”.

That, and too much spending. The budget is in structural deficit because Treasury’s forecasts of growth have been out by about 1 per cent a year for four years and the government has been spending to just under the revenue forecasts, which have been wrong.

Various boffins are now calling for tough measures to return the budget to surplus, but not only is this an election year, the ALP has chosen this moment to increase the funding for the nation’s schools and disabled people, both unarguable propositions with which the Opposition is not arguing. Separately, the Coalition has also chosen this moment to publicly fund parental leave.

There is always a worthy cause or two, or three. But unfortunately the boost to national income from the terms of trade has now peaked and is declining, so the current crop of worthy causes must be paid for by spending cuts rather than revenue windfalls plus over-optimistic forecasts from Treasury.

Company tax collections doubled between 2003 and last year but are now contracting, both because gross profits are lower and depreciation is higher because of the investment boom.

There have also been decisions by the Labor government over the past four years that have added about $50 billion to revenue, of which $60 billion has been spent (MRRT and carbon tax revenue was wildly overestimated but the money was spent anyway).

But according to the Grattan Institute, the problem is not mainly caused by government decisions, but a blowout in health spending, mainly hospitals, caused by the fact that Australia’s health system is demand-driven – and everyone is demanding more.

Health expenditures by Australian governments grew by 74 per cent in real terms over the last decade, or $42 billion, of which $30 billion was due to “new, improved and more services per person” – not the ageing of the population or rising per unit costs (The rise and rise of health spending, April 23). Spending on hospitals has grown $11 billion more than GDP growth would have implied.

As a result of this blowout in health expenditure, the budget is now in the position where it can’t grow its way out of deficit, which is the shorthand definition of a structural deficit. That means to return to surplus there must be a meaningful fiscal contraction – either spending reductions or increased taxes, or both.

That won’t happen this year, that’s for sure. We will have to wait for next year, and the traditional tough budget in the first, and maybe second, year of a new government, before it starts spending again in time for the next election.

Read more: http://www.businessspectator.com.au/article/2013/4/24/economy/hooray-we-might-lose-aaa
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stinkbug
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Andrew Judd
21 Apr 2013, 10:03 AM
How can the institutional financial strength of Australia be high if the big 4 are levered 63 times to their capital base??

What part of this am i getting so muddled up on?

On the face of it a few percent fall in house prices is going to mean that the banks will have to by recapitalised by shareholders or the government. er.....i think they need to make losses first since loan assets are not altered by fallling house prices. However you would think that there would be a capital adequacy adjustment by some method as risk increases on the assets.
Average LVR across all loans is less than 50% last I checked.
---------------------------------------------------------------

While it's true that those who win never quit, and those who quit never win, those who never win and never quit are idiots.

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frankrider
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NotFooled
13 Jun 2012, 03:06 PM
So you are claiming the following is incorrect?
Of course it's incorrect you fool, and an analysis based on a bunch of statistics based on a bunch of lies is just as incorrect.
"Moodys"? Wake up to yourself.

Negative gearing is a form of leveraged speculation in which a speculator borrows money to buy an asset, but the income generated by that asset does not cover the interest on the loan

A negative gearing strategy can only make a profit if the asset rises so much in price that the capital gain is more than the sum of the ongoing losses over the life of the speculation. http://en.wikipedia.org/wiki/Negative_gearing
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'AAA' despite $18b deficit

May 14, 2013 - 11:45PM

Australia’s AAA rating remains unchanged despite the federal government handing down an $18 billion deficit.

The world’s two largest ratings agencies have retained Australia’s AAA rating due to the nation’s low public debt and prudent fiscal policy in the medium term.

In a statement, Moody’s said the outlook for Australia remained strong as the projected budget deficits were only a small percentage of GDP.

Although the government budget is now forecast to remain in deficit through the 2014-15 fiscal year, the projected deficits are relatively small as a percentage of GDP,’’ Moody’s said.

‘‘As a result, the ratio of government debt to GDP will rise only marginally, and Australia will remain among the few AAA-rated sovereign debt issuers that have low debt levels.’’

Moody’s said Australia’s main vulnerability was its dependence on external capital markets for finance, but it was not a major risk to the government’s financial position.

For the next two years the current account deficit is projected to be smaller than the average of the past couple of decades, which lessened the vulnerability.

Moody’s Investors Service senior vice president Steven Hess said although Australia’s budget was now forecast to remain in deficit through to 2014-15, the nation’s level of debt was still low.

He said Australia’s gross national debt was about 20 per cent of GDP, compared to over 80 per cent for the US and Germany.

Read more: http://www.smh.com.au/business/federal-budget/aaa-despite-18b-deficit-20130514-2jkwa.html
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China is set to offer its alternative to the big three US credit rating agencies, Moody's, Fitch, and Standard and Poor's. The Universal Credit Rating group is due to launch next month in Hong Kong, and is a joint Chinese, Russian, and American venture.

The US ratings agency Egan-Jones Ratings Co and Russian RusRating will become partners with Dagong Global Credit Rating in the undertaking. The new agency will start with around 20 analysts aiming to gradually grow to more than 100.

UCRG will be the second such venture based in Hong Kong after China Chengxin, which established an office in Hong Kong in August last year.

The project is aimed at boosting China’s influence on the global ratings system, and challenging the prevalence of the big American firms. The impartiality of their work has been questioned since the global financial crisis in 2008.

http://rt.com/business/chinese-ratings-agency-alternative-us-004/
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Australia’s credit rating threatened if we get real downturn

PUBLISHED: 14 hours 10 MINUTES AGO
Christopher Joye

This budget is more important than it seems, and Tuesday night’s price action indicated as much.

“The market reaction to the budget was negative, with the Aussie dollar quickly falling half a cent,” NAB’s Peter Jolly noted. Within a few hours the Aussie had slipped below 99US¢.

The key insight is that if Australia experiences an acute downturn in the next three years we could sleepwalk our way into a real crisis.

And the budget offers scant comfort to financial markets participants that are closely watching for changes in our creditworthiness.

“Australia has squandered the mining boom and the vital fiscal flexibility it should have afforded,” says hedge fund trader Brendan Paul, of MST Capital.

The problem is there is little fuel left in the monetary and fiscal policy tanks at a time when the jobless rate is low and growth is near trend.

The popular rhetoric is that this budget is still-born and irrelevant, that it will be superseded by the Coalition’s decisions post-September.

But this narrative is wrong: the budget tells us a great deal about current policy settings, the legacy the next government inherits, the substantial challenges that lie in wait, and the downside risks.

Consider these facts: the RBA’s cash rate is at a record low, fiscal policy is currently producing substantial structural deficits, and yet the jobless rate is 5.5 per cent and the economy is near capacity.

“Accounting for the cyclically high terms of trade, Australia has the weakest of the ‘structural’ fiscal balances in the AAA club,” says UBS strategist Matthew Johnson.

He argues that the failure to plan for the inevitable decline in commodity prices is “symptomatic of broad policy failure”.

Following the budget, NAB’s global head of research, Peter Jolly conceded, “It’s fair to conclude that Australia is at the weaker end of the remaining AAA’s.”

“[The] budget, with only a slow crawl back to surplus, hasn’t improved the relative positioning of Australia amongst the eight [AAA rated nations].”

This not a subject you are likely to hear or read a lot about—the major banks rely crucially on Australia’s AAA credit rating for their own AA- ratings. Few economists have an incentive to highlight the politically controversial credit rating risks.

The over-egging of the “cash splash” during the global financial crisis has meant that our stock of total government debt has tripled from $150 billion in 2007 to $502 billion in 2012. And there is more to come.

As a share of GDP, gross government debt has jumped from under 14 per cent in 2007 to 34 per cent in 2012. This is not far from the 1993 peak of 40 per cent. And it conceals sneaky off-balance-sheet items like the $40 billion NBN.

“It concerns me that debt is rising when the economy is near capacity, as it implies the deficits are structural,” Johnson observes.

He also explains that ‘net debt’ is a “bit of a myth for Governments, as they typically struggle to sell assets.”

“At present, the Australian Government is increasing gross debt to fund the NBN, but net debt does not rise as they claim it is a financial asset.”

“Well sure, they could sell it in theory, but doing so is not going to be easy. Look at the trouble they had selling Telstra.”

HSBC’s Paul Bloxham generally agrees: “It’s disappointing the economy is growing near trend and the government is not close to a structural surplus.”

The question is what happens if we have a real downturn in the next three years? If our major Asian trading partners suffer an adverse shock, and export revenues plummet, the RBA and Treasury have little they can do.

One eventual casualty could be Australia’s prized AAA credit rating.

Read more: http://www.afr.com/p/national/budget/australia_credit_rating_threatened_MXhP6nOxG7lnDT2IaVfjxL
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S&P maintains Australia's AAA credit rating

Standard & Poor's has maintained its AAA sovereign credit rating for Australia, citing public policy stability, economic resilience and "significant" fiscal and monetary policy flexibility.

The ratings agency said the outlook for the rating also remained stable.

S&P credit analyst Craig Michaels said the global recession of 2009 showed the level of Australia's resilience against large economic and financial shocks, he said.

But he also warned that Australia's high external imbalances, dependence on commodity exports and high household debt moderated those strengths.

Unexpected changes in those factors could affect Australia's credit ratings, S&P said.

"We could lower the ratings if external imbalances were to grow significantly more than we currently expect, either because the terms of trade deteriorates quickly and markedly, or the banking sector's cost of external funding increases sharply," the agency said.

"Such an external shock could lead to a protracted deterioration in the fiscal balance and the public debt burden.

"It could also lead us to reassess Australia's contingent fiscal risks from its financial sector."

Read more: http://www.businessspectator.com.au/news/2013/7/18/australian-news/sp-maintains-australias-aaa-credit-rating
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