Euro Credit Insurer deflates Australia’s Ratings

Australia and New Zealand have had their debt ratings downgraded, the only two industrialised countries to be flagged for caution in the new global survey by the Paris-based business rating and credit insurance giant Coface.

On the eve of its annual Country Risk Conference in Paris, which was to be addressed by the President of the European Central Bank, Jean-Claude Trichet, last night (Sydney time), the firm warned that the credit crisis would spare no zone and that for the first time, two of the biggest emerging economies, Russia and China, had been placed on negative watch simultaneously.

Christine Altuzarra, head of the firm’s Advanced Economies and Global Sectors division, told the Herald that Australia’s rating was downgraded primarily because of its dependence on the mining sector and exports of raw materials, and the forecast slowing of demand from Asia.

Australia’s rating was cut from A1 to A2, which means the country’s political and economic situation remained good but the business environment faced shortcomings

“Firstly, it is a country very dependant on raw materials and, of course, with the fall of raw materials prices and the great dependency on the Asian demand – China, Japan and South Korea – we think that there will be a fall in exports and a fall in investment too,” she said.

The country ratings issued by the Coface measure payment defaults by business in each country to map out how companies’ financial commitments might be affected by local factors.

Coface, one of the biggest credit insurers with about €400 billion ($789 billion) at risk, monitors 154 nations using a number of indicators including political factors; risk of currency shortage and devaluation; ability to meet financial commitments abroad; risk of a systemic crisis in the banking sector; cyclical risk; and payment behaviour for short-term transactions.

Ms Altuzarra said there had been debate in Coface about the state of the housing market both in France and in Australia. There had been agreement that neither nation had experienced a real “housing bubble”.

“What we saw in the UK and in Spain between 2000 and 2007 was that prices rose brutally and while they are not going down as brutally, construction activity went down very sharply in these countries as well as the US. But we do not see that in Australia… at least not in the short term.”

She said while the national consumer debt level was high, banks had been relatively cautious in their lending policies and consumers were still managing to service debt.

“They don’t have subprime problems like in the States but of course consumers will be very cautious in spending and like many other countries will build up emergency saving and pay off debts. That is why we were worried about Australia and downgraded.

Australia’s proximity and dependence on Asia means that in 2009 it will have problems with exports and tourism, too. However, we do not see Australia in recession in 2009 and debt is not very high.

Among other countries assessed, Germany, Belgium, Spain and Greece have been placed on negative watch but did not have their ratings downgraded. Taiwan and Hong Kong were downgraded while China, Singapore and Pakistan were placed on negative watch

About: Rick Adlam: Rick Adlam has been helping clients with home loan finance since 1985 when he was home consultant with AV Jennings. Rick started Equity Home Loans in 1996 to help homeowners become property investors. Rick currently consults in the development of Mr Mortgage for mortgage brokers and HomeMate for new home buyers. Website: http://www.mrmortgage.com.au