Photo by Chris Hondros/Newsmakers

Last week’s federal budget may not have been as unremarkable as traders and markets thought.

That’s the worrying possibility raised by Peter Jolly, the NAB’s global head of research, in a note to clients with the intriguing title “S&P’s patience on Australia’s AAA, about to break?”

Jolly says that while Fitch affirmed Australia’s AAA rating immediately after the budget and Moody’s noted the federal budget leaves Australia vulnerable, the third rating agency, Standard and Poor’s “has yet to make any substantive comment”.

That’s unusual say Jolly and may reflect S&P’s concerns about the level of debt the Australian government is forecasting for itself over forecast horizon.

“The Government now expects net debt to peak at a higher 19.2% of GDP in 2017-18 and then decline modestly in the out-years. The prior mid-year fiscal update, from December, saw net debt peaking at 18.5% of GDP in 2017-18” he said.

He notes that after S&P said on budget night “we will look through the details of the budget over the coming weeks” that the fact they have not yet said anything is unusual.

Jolly said (our emphasis):

My credit research colleagues, Michael Bush and Andrew Jones, have gone back and looked at how S&P has reacted to the past 14 Budgets. On all but 2 occasions, S&P came out within 24 hours of the Budget and affirmed the AAA credit rating. Once was in May 2008, amidst the Global Financial Crisis. The other occasion was last week.

Jolly notes that he might be “guessing a bit here, but it is at least possible the extra time S&P is taking to make their judgment means Australia’s AAA is under more active consideration currently”.

He says one other reason for the delay is that S&P might be recalibrating the budgets expectations to its $40 a tonne iron ore target rather than the government’s $55 as forecast in the budget.

However anyone who’s ever driven a model knows that a change such as that only takes as long as hitting shift and the F9 key and waiting for the model to recalculate.

Jolly says there are four potential options open to S&P: affirm the AAA rating, place Australia on negative outlook, put Australia on credit watch with negative implications, or downgrade Australia from AAA.

Each of these steps has a higher level of severity and potential impact in credit markets and on the AUD/USD. But the NAB’s “judgement is that S&P is likely to either affirm the AAA rating or send a lower level warning by putting the AAA rating on negative outlook”.

The general election is may also be a complicating factor in the credit rating agency’s deliberations Jolly says.

If the NAB’s right then the impact on markets from a negative outlook should be muted Jolly says because even though it would place Australia at the lower end of the spectrum of countries with a AAA rating from all three ratings agencies it is not a downgrade and does give the government room to react and rebuild its position.

That, Jolly says means neither he nor the NAB would “want to overstate the impact” of a change to the outlook.

Whatever the outcome the fact Standard and Poor’s is still yet to give its verdict on the budget or Australia’s rating looks highly unusual.

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