S&P explains its position on state ratings

Standard & Poor's released a report on the stability of the credit quality of the Australian states last week. The report was in response to questions received after S&P recently lowered its long-term credit rating on Queensland to AA+ from AAA, and also questions received after the outlook change to negative on New South Wales' AAA long-term credit rating, in August last year.
 
The key question addressed was: "What is the overall outlook for the Australian states?"

In a statement of the obvious, S&P notes that by definition the stable outlook on six of the seven rated states implies no rating changes are expected in the next two to three years. New South Wales is the exception with a negative outlook, which implies a one-third chance that its rating could be lowered in the next two to three years.

S&P examines the effect of net financial liability triggers on the state's ratings. Queensland exceeded the trigger for its previous rating. With this being judged as likely to be permanent, the rating assigned to Queensland was lowered.

S&P says NSW has some buffer while Victoria and ACT have large buffers. South Australia has exceeded its buffer but this is expected to be only a temporary situation. Western Australia is approaching its buffer but is expected to re-prioritise its capital expenditure plans.

Exceeding a net financial liability trigger does not automatically lead to a downgrade, it is one of eight factors that are considered. Standard & Poor's does not rate the Northern Territory.

Fitch released a report on the impact of the global financial crisis on high grade sovereigns, specifically those countries rated AAA.

Fitch notes that there are few entities that have a stronger credit profile than a AAA rated sovereign but there is tremendous uncertainty regarding any assessment of the ultimate fiscal cost of the GFC, the severity of the economic downturn, the ability of economies to restructure and recover and the pace of post-crisis fiscal consolidation.
 
Among its conclusions, Fitch observes that the lack of reserve currency status for New Zealand (along with Denmark and Sweden) could result in greater monetary and exchange rate pressures, if there is any increase in distress in the local banking sector.

However, Fitch says there is little evidence of this at the moment and New Zealand should be well placed to benefit from the eventual global economic recovery.

Australia is also well placed to benefit and in fact its position is enhanced by the moderate depth of the AUD market.

Applying a vulnerability matrix, Fitch assesses New Zealand's exposure to the GFC as being moderate with weak adjustment capacity. Australia's exposure is assessed as low with strong adjustment capacity, while the United Kingdom and United States are assessed as having high exposure but strong adjustment capacity.

Moody's took the opportunity to examine in a special report the refinancing risks facing the public private partnership sector and the challenges associated with funding new PPPs.

Moody's notes that while six of the 18 PPPs that it rates are exposed to refinancing risk, none of the six has debt maturing before 2014.

Nevertheless, the ratings of certain projects could ultimately be affected by the appetite of banks and bond investors for PPP exposure and the credit margins that may be applied.

The financing of new PPPs will be challenged by these factors for some time to come and, to the extent that bank finance is available, tighter underwriting standards will be applied.

Moody's says it remains to be seen how governments will respond to the changed market conditions, attempts to transfer refinancing risk to the public sector and a reduction in the availability of funding for new projects.