Australia’s continued government budget deficits as well as the probability of a political stalemate while the results of the last election are finally tallied may result in the country losing its AAA rating, after S&P Global Ratings lowered its outlook on the country's debt to negative.
The ratings agency said there was a one-in-three chance it could lower the country's credit rating even further within the next two years if it concluded that the parliament wasn't making concrete moves to legislate savings or revenue measures in order to narrow or eliminate the budget deficit by the early 2020s.
In a statement Thursday, a spokesman for S&P said, "Without the implementation of more forceful fiscal policy decisions, material government budget deficits may persist for several years with little improvement. Ongoing budget deficits may become incompatible with Australia's high level of external indebtedness and therefore inconsistent with an 'AAA' rating."
Aussie Falls
The Australian dollar reacted to the news, falling as low as $0.7464 from levels as high as $0.7538 before the announcement.
Australia is currently still rated AAA by Fitch Ratings and Moody's Investors Service but earlier this week, Fitch said it was concerned the political holdup could lead to an increase in the fiscal deficit, which could jeopardize the rating.
The Australian benchmark 10-year yield moved slightly on the announcement, to 1.884 percent from around 1.874 percent before the news, well above most developed market bond yields, with the 10-year Japanese government bond at negative 0.27 percent, the 10-year German bond at negative 0.1761 percent and the 10-year U.S. Treasury at around 1.365 percent.
The Reserve Bank of Australia on Tuesday kept interest rates at a record low of 1.75 percent amid relatively benign inflation, but analysts generally expect at least one 25 basis-point rate cut sometime later this year.