On Friday, Queensland became the first Australian state to have its credit rating downgraded from AAA to AA+. Ratings agency Standard & Poor’s said the drop reflected projected deterioration of the state’s budgetary performance and increasing net financial liabilities. S&P said there was nothing wrong with Queensland’s balance sheet but the new rating reflected significant decline in operating revenue due to global conditions and a large capital program. “Queensland’s financial performance remains strong but is no longer consistent with an ‘AAA’ rating,” said the agency.
The downgrade came after Queensland Treasurer Andrew Fraser announced a $1.6 billion budget deficit outlook this year, just two months after the government predicted a modest surplus. Economic growth in Queensland is also forecast to slow further into 2009-10. Fraser blamed the global downturn, rising unemployment and the flood emergency in North Queensland. He now admits avoiding a recession would be “a close run thing”.
Queensland will have to pay an extra 0.4 per cent in annual interest, around $200 million a year. State borrowings will cost Queensland $3.2 billion in interest next financial year and total government borrowings for the next three years will be $74 billion. Anna Bligh’s Government is forecasting job losses in the coming financial year and a growth rate close to zero. George Megalogenis says Queensland’s collapse is one of Kevin Rudd’s darker nightmares because “a Queensland that does no better than the national average will, of itself, increase the risk of recession for the nation.”
Andrew Fraser has defended Queensland’s position. He said the government would “hold its nerve” and retain its economic strategy outlined in December’s Major Economic Statement. He said the infrastructure program would deliver 120,000 jobs and account for 1 per cent of Queensland’s overall economic growth. “The economy needs the stimulus of the infrastructure spend, to support activity, support demand and support jobs as private investment evaporates,” he said. “We are choosing to put the interests of Queenslanders facing unemployment ahead of the political sanctity of a budget surplus.”
With early election speculation mounting, opposition leader Lawrence Springborg said losing the AAA rating was a financial disaster which will cost “the mums and dads” of Queensland hundreds of millions in increased interest payments and would affect jobs. “Labor should be ashamed of putting Queensland behind an economic basket case like New South Wales,” he said. “We are now the only State in Australia that doesn’t have an AAA rating. It’s embarrassing.”
Dr Nicholas Gruen thinks it may spread to other states. Gruen is the CEO of Lateral Economics and writes for Club Troppo and is a frequent contributor to the Australian Financial Review. He told Woolly Days today that given the worsening state budget positions, Queensland would not be the last to be downgraded. He defended Fraser’s position saying now was not the time to cut back on capital works. As Gruen wrote in the AFR in September (article paywalled) “the electorate likes to see governments investing in the future. And the alternative – arbitrarily restricting investment whilst commuters nurse their resentments in traffic jams or waiting for late trains – is a political road to nowhere.”
UQ academic and economist John Quiggin believes an AAA rating is overrated and rating agencies are part of the problem. He says the global crisis exposed fundamental weaknesses in the way ratings are determined and adjusted. According to Quiggin, Standard and Poor’s and Moody’s have suffered credibility issues in the crisis and need improvements to restore independence and transparency. “The privileged position held by these agencies can no longer be justified,” he writes.
Downgrading is not just an Australian problem. Spain and Greece were downgraded this year and now Britain could be stripped of its AAA rating. The Telegraph says Standard & Poor’s might downgrade Britain’s rating because of its asset protection scheme. The scheme provides insurance for “toxic debt” but the Telegraph warns the scheme leaves “the taxpayer exposed to losses on billions of pounds of bad loans made by the banks.” Yet it is unlikely the UK Government will ever default on its debt commitments. A credit rating downgrade is not the end of the world.
Nicholas Gruen thinks credit ratings should be taken seriously but governments need to take risks in tough times. That means taking on projects and debts the private sector is avoiding. He says an obsession with an AAA rating is an obstacle to governments playing a rightful role in dealing with the economic crisis. “There’s a dynamic to fiscal responsibility and fiscal management,” he said. “Had the Queensland Government invested more in the easy times, it would be worth more now.”