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Victoria milks its AAA rating, but is it really creaming it?

Victoria’s AAA rating has been affirmed - but are we now cynical about these measures? Image sourced from

Credit rating agency Standard & Poor’s affirmed Victoria’s AAA credit rating last week and State Treasurer Michael O’Brien milked the announcement for all it was worth. “Victoria,” he said proudly, “remains the only Australian state with a AAA credit rating and a stable outlook from both major ratings agencies.”

All this is true of course, but it is also a tad misleading, for the ACT also enjoys a AAA rating with a stable outlook, although admittedly it is not a state. And then there is NSW, which Victorians may not recognise as a state, but which also has a AAA rating from the three ratings agencies. It does, however, enjoy a “stable” outlook from two rather than all three agencies.

Victoria has previously been warned by S&P that it risked losing its much cherished AAA status, which followed the agency’s shock downgrade of WA’s credit rating to AA+ in September, citing rising debt and a failure to rein in spending. It also follows some pretty tough medicine that was dished out to Queensland in 2009, when all three of the ratings agencies downgraded the state to AA, and one followed that up with another clip just two days after the 2012 budget, again citing a widening deficit and growing debt as the problem.

To be fair, O’Brien could have gone further, for in the increasingly surreal world in which we live, Victoria now has a credit rating matched by only nine nations across the globe. The ratings agencies rate Australia’s second biggest state as more likely to repay its debts than the US, the UK, France and the Netherlands, which is certainly good news for O’Brien, but has left a lot of others scratching their heads.

Putting issues like this to one side, from O’Brien’s point of view why not make the most of what is unambiguously good news? Here is external evidence that the Coalition government is managing the till very well, something that Labor could not be trusted to do. “Since coming to office,” O’Brien said, “we have…repaired…the structural budget deficit created by Labor. We have implemented savings and revenue initiatives averaging around $3 billion a year over the 2013-14 Budget and forward estimates period.”

In saying this, he was able to quote from S&P’s remarkably glowing assessment. It praised the Government for its “difficult political (sic) decisions, including containing wage growth and reducing the number of public servants”.

Politics is not meant to be S&P’s bag, of course, for it is the state’s finances not the Coalition government that was being rated. On questions financial it was equally glowing, claiming “Victoria’s own financial strength is evidenced by its prudent approach to debt and liquidity management…”.

It is not clear exactly what is meant by this, however, for over the last three years the state has been more than liberal when it comes to the use of debt, which has literally skyrocketed since the Coalition won office, despite policy settings intended to take things in the opposite direction. In 2011 net general government debt was $11 billion. This year it will hit $20 billion. And in two years time, it will climb to $25 billion.

Nor has the Coalition been consistently fiscally tough. Despite a wretched revenue outlook, its first budget was more generous than Labor’s last, requiring the Coalition to suddenly slam on the fiscal brakes six months later.

All this raises the question of whether or not the AAA rating is the kind of objective measure of financial management it is assumed to be.

Analysts have struggled with this since the global financial crisis of 2008-2009, when agency ratings gave false comfort to investors and governments on financial instruments that turned out to be junk and sent the global economy to the brink of financial ruin.

But it can be questioned whether ratings agencies will continue to wield the power they once held. During the lead up to the Global Financial Crisis, the ratings agencies were very quick to issue AAA ratings to all sorts of exotic financial instruments in which a lot of innocent parties, including Australian not-for-profits and a number of local governments, ended up getting seriously whacked, having assumed a product with a AAA rating was a safe bet.

Imad Moosa, a former economist at the IMF, recently explained this on the ABC’s 7.30, concluding, “They (the ratings agencies) have proved to be either incompetent or corrupt or even both”.

Other analysts have noticed how ratings don’t seem to matter much any more in any case. As [Greg Jericho pointed out](]( last year: “The funny thing, however, is that since the GFC and the utter failure of the credit ratings agencies, the markets have taken to ignoring them. … Despite a number of negative outlooks and a downgrade, the yield on USA Treasury 10-year bonds has continued to fall… the UK, despite a massive austerity program, … received a negative outlook from Moody’s in March 2012, and yet the interest they had to pay on their government bonds continued to fall - pretty much at the same rate as did the US bonds.”

The G20’s Financial Stability Board (FSB), which was created in the wake of the Global Financial Crisis, has recently upped the ante, by actively recommending an end to the financial system’s reliance on ratings agencies.

In its recent update released in August, the FSB recommended that financial market authorities around the world work rapidly to end “the mechanistic reliance of regulatory regimes and of market participants on external ratings”, which can “lead to herd behaviour and cliff effects in market prices when downgrades occur”.

It is a pity that during the good times, politicians like O'Brien have not taken the opportunity to castigate, rather than embrace, the ratings agencies that have done so much harm to the global economy and made a fortune along the way.

So we find ourselves inhabiting a world where it does not matter whether the ratings are accurate or not, whether they have any real effect, or whether those that do the rating are credible or ethical. For individual politicians and mainstream media outlets, what matters is whether a AAA is given or taken away, for that becomes a simple and eye catching headline. Because let’s face it - that is now more important than the truth.

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