Australia faces AAA credit rating downgrade over deficit

Standard & Poor’s has warned of a downgrade to Australia’s coveted triple-A credit rating within two years, saying the knife-edge July 2nd election may have weakened the government’s ability to tackle its budget deficits.

It cut its outlook on Australia to negative from stable and said there is a one-in-three chance of a ratings downgrade should the government fail to materially improve its balance sheet.

The warning will come as a major blow to prime minister Malcolm Turnbull, who is scrambling to gain support from a small handful of independent lawmakers he will likely need to form a workable government and end a political vacuum after an unexpectedly close election.

The Australian dollar initially shed half a cent to a session low of $0.7467 after the stable outlook was downgraded by S&P, but has since recovered to be back above 75 cents.

“We will continue to monitor, over the next six to 12 months, the success or otherwise of the new government’s ability to pass revenue and expenditure measures through both houses of parliament,” S&P said.

Treasurer Scott Morrison said the warning has strengthened his resolve to improve the government's budget position.

“I have no intention of postponing the pace of fiscal consolidation and so therefore I remain very determined to ensure that the warnings that are in this report are not realised,” he said.

Analysts expect no lasting market impact from the warning for now. Australia’s 10-year bond yields at 1.88 per cent also make the country’s debt highly attractive compared to the negative yields of some of its peers.