Australia's Sovereign Debt Rating and the Likelihood of Default

by: Paul Hanly

Felix Salmon has reported that CMA Datavision released its sovereign risk report for the second quarter of 2010.

According to Felix, the CMA report is based on CDS prices, and it makes for fascinating reading. It was a bad quarter for sovereign credit: 93% of sovereigns widened, and they widened a lot — by 30%, on average.

CMA say Australia is viewed as having one of the lowest default risks globally but the costs of insuring its debt has increased by 52.3% this quarter

I question their ranking (or the credit market's assessment) for Australia as number 10 safest (and down 3 places).

Pimco's Ring of Fire article had Norway, Sweden, Germany, Netherlands and Canada in their Yellow ring based on debt and deficit, while Australia, Finland and Denmark were in the Green ring.

The revised rating may just be a coincidence of timing as a result of the Resources Super Profits Tax that was originally proposed and which has now been agreed by the major mining companies in a modified, limited form but has not yet been passed into legislation.


  1. has very little sovereign debt, about 13% net.
  2. avoided recession
  3. has unemployment about 5%
  4. is rated AAA by S&P (but their recent history is not good!),
  5. has exchange rate against the USD, while off its recent highs, is still about 1 Standard deviation above its 20 year average
  6. exports basic materials to the most rapidly growing large economies in the world,
  7. has a centre left government in a long term stable democracy
  8. has a relatively egalitarian society as measured by Gini coefficient compared to eg US
  9. is a G20 economy
  10. has an open economy
  11. has large energy reserves in coal and natural gas (which can be used as a petrol substitute at about $1500 USD per car)
  12. has both major polical parties committed to a return to surplus by 2013 as opposed to merely halving deficits like many countries
  13. issues its own currency (dual sovereignty, unlike Eurozone countries.
  14. has a good compulsory superannuation system with 9% (and increasing) contributions so has savings for retirement and has a schedule of increasing ages for eligibility for aged pensions and governments have in the main moved away from defined benefits for new employees.
  15. has replaced and added to its public and private (catholic systemic included) educational infrastructure and increased its energy efficiency through an insulation program while other countries rescued banks, insurers and car manufacturers
  16. 16. has commenced a move away from fossil fuels with hybrid car manufacture on shore, insulation scheme implemented (poorly but largely complete) and a 20% renewable energy target by 2020 and has a proposed (but heavily criticised) emissions trading scheme which was rejected by the Liberal (conservative) party in the Senate, so Australia will not face an overly rapid adjustment to climate change because it has made a significant but not crippling start already.

On the negative:

  1. Australia may have a housing bubble, but there is little oversupply of housing and affordability is not critical based on current interest rates and prices, although it is of concern to some on the basis of median prices compared to median incomes.
  2. The Federal government has overreached on some issues and the proposed RSPT caused some concerns but is now largely resolved with agreement of industry.

I believe the CMA rating (or the credit markets in pricing CDS) has confused sovereign with national debt in the case of Australia, or made some other error of judgement in light of the extremely low Australian sovereign debt. Another possibility is that the CDS markets are taking into account the foreign debt owed by Australian banks, which have borrowed heavily offshore to finance Australia's heavily indebted (as a percentage of GDP) household sector, but Australian banks are among the highest rated in the world.

Thanks Felix for your article and link, and thanks to CMA for allowing free public access to the report (subject to registration).

Disclosure: 30% in stock market through emerging, commodity, Australian and international funds, 70% mixed bonds (plus Australian real estate exposure)