Australia has maintained its AAA credit rating, with all three ratings agencies indicating there would be no downgrade for now.
ABC business editor Ian Verrender didn't expect a ratings downgrade to necessarily follow Treasurer Scott Morrison's MYEFO budget update today, but says the coveted AAA rating is doomed.
Read on if you're not sure why that would be an issue.
What are credit ratings?
Basically, a credit rating is a measure of how likely a borrower is to be able to repay their loans on time and in full.
So, the better your rating, the more confident a lender can feel that they'll see their money again.
That means they'll be more likely to lend you money and be more likely to give you better loan terms — like a lower rate of interest.
The best rating you can receive is AAA — that's what Australia currently has.
The lowest rating you can receive while still being considered "safe" is BBB-/Baa3. The worst rating you can receive is D which means you've defaulted (i.e. you've failed to honour a loan agreement).
Ratings aren't just given to governments. Companies get them too.
How are credit ratings determined?
Three agencies are responsible for 90 per cent of the global ratings market: Moody's, Standard & Poor's (S&P) and Fitch.
They all have their own methodologies for how they determine ratings, but they usually arrive at similar conclusions.
Ultimately, they're looking for any factors that would impact on a borrower's ability to repay a loan.
These are the risk factors that S&P takes into account when it rates a government:
- Political risk
- Income and economic structure
- Economic growth prospects
- Fiscal flexibility
- General government debt burden
- Off budget and contingent liabilities
- Monetary stability
- External liquidity
- External debt burden
The reason all eyes were on today's budget update is that it gave an insight into many of these factors.
How does Australia rate compared to other countries?
Australia currently has AAA ratings from all major agencies.
That means we're in exclusive company with Singapore, Sweden, Canada, Denmark, Germany, Hong Kong, Lichtenstein, Luxembourg, Netherlands, Norway and Switzerland.
The biggest economy in the world, the United States, just misses being in the club; it has AAA ratings from Moody's and Fitch, but was downgraded to "AA+" by S&P in 2011.
China, meanwhile, has ratings of AA- (S&P), Aa3 (Moody's) and A+ (Fitch).
The recent Brexit vote led to a drop in the ratings for the United Kingdom; it's sitting at AA, Aa1 and AA.
And how's Greece doing following its recent financial troubles? It has ratings of B-, Caa3 and CCC.
Other countries which aren't faring so well include Venezuela (CCC, Caa3, CCC) and Mozambique (CC, Caa3, CC).
Would a downgrade affect us?
Yes, but not necessarily in the ways you might think.
It would likely make it a bit more expensive for the Commonwealth Government to borrow money.
Not necessarily though. Japan's borrowing costs actually fell when its credit rating was downgraded in 2015. The lesson there is that other economic factors are at play when it comes to borrowing costs than just credit ratings.
A sovereign downgrade could actually have a bigger impact on Australian banks. Even though they are rated separately from the nation, their ratings are linked because they would likely be bailed out in the event of a crisis.
That means it could become more expensive for banks to borrow foreign money which in turn could mean Australians get charged more interest on their loans.
And beyond these direct economic impacts, the ratings could have an effect on business confidence.
RN Breakfast's business editor Sheryle Bagwell explained earlier this year that the real impact would be on national pride and the economic credentials of the Government:
We last lost our triple-A credit rating in 1986 after Paul Keating warned Australia was becoming a third-rate economy — indeed, a banana republic — because we weren't getting our economic house in order.
It took us 16 years to get it back, so losing the top rating again wouldn't be a good look.
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