by Adam Lysle

Well, a quick snapshot: The race to the Prime Ministership resembling an episode of the infamous Days of Our Lives soapy with a long drawn out battle over nine undecided seats and the prospect of a volatile senate still looming; we have a damning report in New South Wales over the greyhound racing industry which will see an end to that industry in NSW and the ACT at the very least from 1 July 2017; the American election is an even more interesting evolving situation when considering the world’s stability and of course Brexit is an extraordinary vote result that only time will tell what effect it will have on the world stage. All of these stories have certainly stolen the headlines lately.

What has potentially slipped the focus of many people though is the Standard & Poor’s downgrading of the outlook on Australia’s AAA credit rating. What does this mean? How and why are they looking at us so dimly?

In their report, they have flagged the high levels of external and household debt and the political instability over the last decade are the primary factors. In fact, they have stated that there is a one in three chance that the rating will be downgraded within two years.

Leave the political arguments aside for one moment (especially which political party is to blame), the reality is that such a downgrade being on the horizon should be a warning signal to all of us about ensuring that our backyard is in order. Why do you ask? Well, here are a few things that typically would happen if the rating were to be downgraded:-

Dollars and percentages

  • Global interest rates charged to the Australian Government for the extraordinary levels of debt will rise;
  • The investment opportunities in Australia will no doubt reduce;
  • The Reserve Bank will probably lift the cash rate and there even may be an adjustment of monetary policy within Australia; and
  • The Australian banks will no doubt increase their lending rates as they will be forced to pay higher rates for their own borrowings.

It’s the last item here that will probably have the most profound effect on Australian households and businesses. Why? Well, calculate how much more you would have to pay on your loans if the average interest rate you were paying were to rise by 0.5% or by 1%. Would you be able to afford such an impost on your monthly budget? Would you be able to afford a higher lift? Of course such a lift in interest rates has a larger impact on the whole economy when higher costs like these are then passed on to consumers through a wider price increase on the daily consumables.

So, the point is, whilst we’re naturally attracted to those things happening in the world that are interesting, juicy and appear to have a potentially large impact on our discussions over coffee, make sure we don’t take our eye of those things we do have control over in our households and our businesses each and every day. If we do this, we will ensure our financial survival and will be well prepared for when our AAA credit rating is downgraded (if and when it does).

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