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Standard & Poors confirms Australia’s AAA rating

Standard and Poor’s is more commonly know to investors as the S&P. The agency may be behind the S&P 500 Index and the S&P/ASX 200 Index, but it’s also a key credit rating agency.

A country’s credit rating can range from AAA to junk status. The better a country’s credit rating is the cheaper it is for a country to get credit, also known as a loan. This can have a knock-on effect to that country’s banks and therefore all of its residents. That’s why it’s important for any country to aim for as high of a rating as it can.

Today, Standard & Poor’s confirmed Australia’s rating as AAA, Australia has maintained its AAA rating for a very long time due its enviable economic growth and low net debt position.

The AAA rating will be excellent news for all of our banks like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group (ASX: ANZ), Macquarie Group Limited (ASX: MQG) and Suncorp Group Ltd (ASX: SUN).

However, Standard and Poor’s warned that there was significant uncertainty surrounding Treasurer Scott Morrison’s expectation of reaching a surplus by the 2020s and that the budget situation is too uncertain to relax spending restraint or introduce tax cuts at this point.

The agency said that it could lower the rating over the next 12 months if it appears the government isn’t serious about repairing the budget.

Standard and Poor’s believes that Australia’s record household debt is a clear worry, particularly in the context of Australia’s property market which relies on that debt to be sustainable.

Foolish takeaway

Households are already in danger of budget overloading with interest rates rising in the past year. If Standard and Poor’s knocks Australia’s rating down a peg that would increase the cost of the debt even more and could tip Australia into a recession.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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