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31 Mar 2009
Moody's says Australia guarantee of States is ratings neutral
Sydney, March 31, 2009 -- Moody's Investors Service says that Australia's decision last
Wednesday (March 25) to offer its state governments the opportunity to
use a federal government guarantee on their new and existing debt does
not threaten the country's Aaa sovereign rating or the ratings of
According to the announcement, the Commonwealth government will
charge a fee for the use of the guarantee, which would be calculated
according to a state's credit rating. The guarantee will
not be applicable to foreign-currency debt.
The guarantee offer is temporary, and the Australian federal government
anticipates that states will end their usage of the guarantee once credit
markets return to normal. A key reason for its offer is to level
the playing field between state debt issuance and that of the banks,
which is already eligible for a federal guarantee.
"In assigning Australia's sovereign ratings, we have
always been mindful of the contingent liability of the commonwealth government
as regards state government debt," says Steven Hess,
a Vice President - Senior Credit Officer with Moody's Sovereign
"The assumption has always been that should a state government encounter
a debt problem, there was some probability that the federal government
would come to its assistance. However, given the strong stand-alone
credit quality of state governments, the probability of such assistance
being required is very low," says Hess.
"As to the guarantee, it is -- as indicated -- motivated
by different considerations, mainly state government access to finance
and their borrowing costs. While the extension of this guarantee
makes explicit what we have always considered a commonwealth implicit
liability, it does not affect the Aaa rating of Australian government
debt, as the probability of this guarantee being called is quite
low," says Hess.
That said, the adverse market conditions faced by the state governments
and the banks, which caused the government to extend these guarantees,
have raised somewhat the weight that should be assigned to these contingent
liabilities. Nonetheless, commonwealth finances remain well
within the Aaa range.
"The extension of the government guarantee to the debt of Australian
states carries no rating implications for Australian banks. The
banks can also issue government-guaranteed paper, which carries
a Backed-Aaa rating, with a stable outlook like the sovereign,"
says Patrick Winsbury, a Senior Vice President with Moody's
Financial Institutions Group.
"The increased supply of government-guaranteed debt is unlikely
to be sufficient to crowd out the banks from the domestic debt market.
The estimated funding requirement of the states is, in aggregate,
no more than the funding needs of a single large Australian bank.
And in any case, the major Australian banks can also turn to their
well-diversified and established investor offshore bases,"
The increased supply may drive up the cost of debt funding for Australian
banks in the domestic market, but the impact on bank profitability
is expected to remain contained, as banks have demonstrated that
they have been able to successfully manage their margins during the crisis.
Furthermore, the banks are well ahead on their funding requirements,
having issued over A$90 billion in government-guaranteed
debt since December 2008. Hence, they have some flexibility
and can await favorable market opportunities before undertaking further
large-scale debt issuance.
Finally, because the Australian sovereign's Aaa rating is strong,
there is no impact on our view of the value of systemic support for the
obligations Australian banks that do not fall under the official guarantee
scheme. This consideration provides a two-notch rating uplift
to the non-guaranteed debt and deposit ratings of the four major
banks, and an uplift of one-notch to the non-guaranteed
ratings of the regional banks.
"The impact of the guarantee programme on the ratings of debt issued
by the Australian states and territories will be relatively limited,
as most of these entities are already rated Aaa," says Debra
Roane, a Vice President and Senior Credit Officer with Moody's
International Public Finance Group.
"The guarantee could make a difference on the debt issued by the
Northern Territory (rated Aa1) and the State of Queensland (Aaa,
under review for a possible downgrade)," adds Roane.
The principal methodologies used in rating Australian states and territories
was "Regional and Local Governments Outside the US" and "The Application
of Joint Default Analysis to Regional and Local Governments ", which
can be found at www.moodys.com in the Credit Policy &
Methodologies directory, in the Ratings Methodologies subdirectory.
Other methodologies and factors that may have been considered in the process
of rating Australian states and territories can also be found in the Credit
Policy & Methodologies directory.
The principal methodology used in rating Australia was Moody's Sovereign
Bond Methodology, which can be found at www.moodys.com
in the Credit Policy & Methodologies directory, in the Ratings
Methodologies sub-directory. Other methodologies and factors
that may have been considered in the process of rating Australia can also
be found in the Credit Policy & Methodologies directory.
The principal methodologies used in rating Australian banks were "Bank
Financial Strength Ratings: Global Methodology" and "Incorporation
of Joint-Default Analysis into Moody's Bank Rating Methodology",
both of which can be found at www.moodys.com in the Credit
Policy & Methodologies directory, in the Ratings Methodologies
subdirectory. Other methodologies and factors that may have been
considered in the process of rating Australian banks can also be found
in the Credit Policy & Methodologies directory.
Steven A. Hess
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
Senior Vice President
Financial Institutions Group
Moody's Investors Service Pty Ltd
JOURNALISTS: (612) 9270-8102
SUBSCRIBERS: (612) 9270-8100
No Related Data.
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