While S&P has left the current AAA rating in place for now, the move to a negative outlook implies that Australia has a heightened risk of losing its coveted AAA rating. We should also consider this as being “on notice”, with a one-in-three chance of a downgrade in the next two years.

S&P made note of the budget deficit, and the prospect that this is expected to remain for several years, as a key reason for downgrading Australia’s outlook to negative.

What is a AAA credit rating and why is it important?

A credit rating is a way of assessing an entity, usually a government or company that wishes to borrow money. It gives lenders an easy way of assessing the likelihood of repayment.

Credit ratings have several tiers with AAA being the highest, down through to C rating. Australia is one of few governments globally with a AAA rating. The credit rating of the US Government is currently AA+, just one rung below AAA.

A higher credit rating implies a lower risk to the prospective debtor. As a result, the cost of borrowing money is reduced. This lower rate filters down from federal debt to states debt, banks, corporate debt and eventually to home loan interest rates.

What happens if we lose our AAA rating?

There has been much scaremongering in the media that if we lose our AAA rating, borrowing costs are likely to rise and flow through the wider economy if a downgrade actually proceeded. In reality, the effect shouldn’t be too significant. In theory, a lower credit rating would imply higher borrowing costs across the board, but the general consensus is that the RBA could adjust interest rates to offset any change.

In my opinion, a downgrade would be more of a hit to national pride. We as a nation, and particularly our leaders, are proud of our AAA rating. We are one of very few countries to have this highest designation and the last time our rating was downgraded was in 1986 – and it took sixteen years to regain it.

What needs to happen to keep our AAA rating?

In order to keep our AAA rating, the government needs to make budget repair a priority and reduce the deficit.

Over the next six to 12 months, S&P will continue to monitor the success or otherwise of the federal government’s ability to pass revenue and expenditure measures through both houses of Parliament.

The information provided above is general information only and individuals should seek specialised advice from a qualified financial adviser