Tuesday, September 18, 2012

Bond markets give Fitch the finger?

There were good intentions to comment further on the recent Queensland budget but the best opportunity for a timely response has now passed. There was some interesting commentary which also included a scathing report for the ACTU by Bob and Betty Walker on the Costello audit. Selected highlights:

The Walkers: Review of the Costello Report
A curiosity of the Costello Report is its attitude to budgeting for capital works. It adopts the stance that capital works should be funded without borrowing - disregarding the fact that infrastructure assets are long-lived, and benefit not only the current generation of taxpayers but also future generations.
 Prof Quiggin: Profligacy for everyone except the Public Service;
Audit Commission Review

Measures like this are par for the course for state budgets, but not what you’d expect from a government faced with a fiscal crisis, comparable to Greece or Spain.
The government has fiddled at the edges on revenue, but is doing nothing (or even adding to the distortionary concessions) on payroll tax and land tax.
In essence, the government is relying almost entirely on cuts to the public service, focused on the health sector. This is a high-risk strategy to put it mildly. It may well be that the health bureaucracy is bloated and inefficient, but that doesn’t mean that creating a new layer of regional management is going to improve things, especially when their first task is to implement arbitary cuts in the number of nurses and other employees. Campbell Newman says his promise that “frontline jobs are safe” now means “frontline services won’t be affected by job cuts” but this is just wishful thinking. There hasn’t been any analysis of how to improve efficiency, just an edict that numbers need to be cut.
Gene Tunny: LNG the hero of the budget 
With a third LNG processing plant coming on-line after the end of the budget forward estimates in 2015-16, the Government potentially will have several billion dollars in LNG royalties from 2016-17 to the end of the decade that it can use to fund its commitments at the next election. Hence I expect the fiscal austerity will only be temporary.
 Ben Eltham: Welcome to Austerity
The LNP's determination to cut spending while holding revenue flat is an ideological decision.
Peter Costello
"As I said in my report, you'd have to do something on the expense side, and you'd have to do something on the revenue side. Did they take my advice ? They took some of it. But they're the government, they're entitled to do that."

Despite the budget austerity last week Fitch Research came out and further downgraded Queensland's credit rating from AA+ to AA which seem to be based on concerns about revenue forecasts. This provoked a political blame game including some facebooked "quotes" from the Fitch statement by the member for Cairns which demonstrated his previous journalism skills at News Ltd of not even being able to accurately cut & paste a simple quote!

Queensland Economy Watch has suggested that next time they come visiting Treasury officials should starve the Fitch people of the cream biscuits! This pretty much seems to be the approach already of QTC which, despite the political attention, doesn't even bother to refer to Fitch in any publication.

This weeks update from QTC makes no mention at all of the downgrade from Fitch during the week? Movements in bond yields during the week reported by QTC:

QTC Bonds:   3 year 3.43%  +2 bps
QTC Bonds:  10year 4.34%   -6 bps
Aust Govt bonds:  3 year  2.71%  +15 bps
Aust Govt bonds: 10 year 3.28%  +8 bps

So, Fitch downgraded, and the spread with the AAA rated bonds narrowed rather than the reverse! Not that this is now unusual as reported yesterday at Bloomberg: French S&P Downgrade Was Upgrade in Investor Repudiation:
"The nation’s 1.07 trillion euros ($1.4 trillion) of debt maturing in a year or more rallied 7.4 percent since it was downgraded to AA+ on Jan. 13, more than double the gains for the rest of the global government bond market, and beating AAA rated Germany, the U.K. and Australia ........"
"France’s performance shows investors have determined the analysis done by ratings firms on the world’s biggest nations to be irrelevant. U.S. borrowing costs tumbled after the biggest economy was stripped of its AAA credit grade 13 months ago. About half the time, government bond yields move in the opposite direction suggested by new ratings, according to data compiled by Bloomberg on 314 upgrades, downgrades and outlook changes going back to 1974."
Which makes it all the more curious to discover this op-ed today at the Brisbane Times:  Newman forced to make tough choices because others balked:
"There are many measures that you can use to quantify a state’s performance. To avoid an overly academic debate, in Queensland’s case the most relevant is the opinion of the credit rating agencies."
What planet has this person inhabited for the last 4 years? I haven't heard anybody make a statement giving any such credence to the rating agencies at least since Lehmen collapsed?! Actually, this person recently worked on the LNP campaign for Brisbane City Council. What is the BCC debt again??

Ole' Queensland Bonds?










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