Tuesday, June 12, 2012

More on queensland's debt

Following my previous post on unsustainable debt, Queensland Economy Watch has a good post on a media report of a potential downgrade to Queensland's credit rating by Fitch. Gene refers to the Fitch  outlook as "bizarre" and concludes: 
"The Under-Treasurer should pick up the phone to Fitch and tell them to re-assess their rating or they won’t have any credibility in the future whatsoever."

The rating agencies have come in for a lot of criticism post the GFC and the comments from Gene are mild compared to recent remarks from ICAP economist Adam Carr writing at Business Spectator:
"The surprise obviously is that the ratings agencies are still in business and that anything they say is news. They do help keep the fear alive, I guess and fear, as we know, helps keep treasury yields low. So they are good for something then, if not ratings."

Carr has previously suggested that such ratings announcements seem to coincide reactively with PR opportunities for the agencies to mainatain relevance. This makes the timing of this Queensland report interesting, with the audit commission report due and before a budget, or am I too cynical?  It is interesting that QTC make no reference to Fitch on their website with only Moodys and S&P listed.

Also alluded to by Carr was what was suggested by my previous post, that well rated bond yields are historically low and have been falling. The risks suggested by Fitch (China & europe) would also likely imply continued historically low bond yields. It is interesting even today Tim Nicholls being quoted talking of "debt crisis" and higher funding costs at a time when his bond yields have been hitting record lows.

That doesn't mean I would not prefer that Queensland's fiscal position was stronger and debt lower which does warrant a policy response. However, an unsustainable "debt crisis" and the apparently common perception that Queensland is "broke" are misplaced.

To maintain an appropriate perspective below are the ratings definitions from Standard & Poors who maintain their Queensland rating currently at AA+ and outlook stable. The definition of "very strong capacity to meet financial commitments" is not consistent with "unsustainable" or "broke".

‘AAA’—Extremely strong capacity to meet financial commitments. Highest Rating.
‘AA’—Very strong capacity to meet financial commitments.
‘A’—Strong capacity to meet financial commitments, but somewhat susceptible to adverse economic conditions and changes in circumstances.
‘BBB’—Adequate capacity to meet financial commitments, but more subject to adverse economic conditions.
‘BBB-‘—Considered lowest investment grade by market participants.
‘BB+’—Considered highest speculative grade by market participants.
‘BB’—Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial and economic conditions.
‘B’—More vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments.
‘CCC’—Currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.
‘CC’—Currently highly vulnerable.
‘C’—Currently highly vulnerable obligations and other defined circumstances.
‘D’—Payment default on financial commitments.
Update 22/6: David Bassanese at AFR seems to agree: Governments' war on debt defies reason


1 comment:

  1. Thanks KS. Good point that you can be pro reducing debt without panicking about unsustainable debt.