This week, Moody’s ratings agency warned that Australia’s AAA credit rating was at risk. The report said without measures to raise revenue “limited spending cuts are unlikely to meaningfully advance the government’s aim of balanced finances by the fiscal year ending June 2021”.
It went on to say, “Although Australia had a favourable budget position relative to other countries with AAA credit ratings, Moody’s noted Australia’s government debt had risen to 35.1% of GDP in 2015 from 11.6% of GDP 10 years earlier.”
“We expect government debt to increase further to around 38% of GDP in 2018,” it said. “Climbing government debt is “a credit negative for Australia”, raising the prospect of a credit downgrade in future.”
What a load of tosh!
Moody’s, you might remember was one of the agencies that admitted to the US Congress (at the height of the GFC) that they took money from firms in return for their AAA corporate rating. In other words, their lack of due diligence helped fuel the GFC.
So how much value should we put on a Credit rating agency’s assessment of a currency issuing government? The short answer is, zero.
Moody’s defines a rating as “an independent opinion on the future ability and legal obligation of an issuer of debt to make timely payments of principal and interest on a specific fixed-income security”.
In doing so, they are suggesting that a sovereign currency issuing government could default on payments that are due in the very currency which itself produces. Is it so hard to see how illogical that is?
The risk of default on Australian sovereign debt is zero, given that the $A is issued by the Australian government in unlimited quantities, if it chooses.
As explained by Professor Bill Mitchell, “Once we understand how a sovereign government operates with respect to the monetary system this point become obvious.
First, when a particular government bond matures (that is, becomes due for repayment) the Australian Government simply credits the bank account of the holder with the principle and interest and cancels the accounting record of that debt instrument. Simple as that. The banking reserves would rise by that amount and the wealth of the private investor would change in mix from bond to bank deposit.
One account number rises and another falls by the same amount!
Second, the fiscal deficits run by the Australian government just work in the same way – adding reserves on a daily basis to the banking system (as people spend the $As and deposit them back into bank accounts etc).
The bond issues are designed to give the private sector an interest-bearing financial asset to replace the non-interest earning bank reserves.
Professor Mitchell says, “Australian economy is in decline at present as the most recent Labour market data shows. The mining boom is well and truly over and non-mining investment is falling.
Households are carrying record-levels of personal debt and labour underutilisation is around 15 per cent (the combination of elevated levels of unemployment and underemployment and depressed participation rates).
So when the Treasurer (Scott ‘ScoMo’ Morrison) claims we have to impose fiscal austerity to help the economy you know one thing for sure – he hasn’t a clue about macroeconomics.”
And neither do the ratings agencies. So, when you hear them threaten that unless a sovereign currency issuing nation cuts back on net spending (deficits), they might have to downgrade their rating, you can be sure that they, like Scott Morrison, have no idea what they are talking about
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