Triple A rating - What is it good for ... Huh

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Nerf Herder

Wheel size expert
Looking to test what I'm missing in my comprehension.

Triple A ratings are good as it does a few things
- highlights economic stability
- suggests prudent economic management by the government or successive governments
- all of which is most useful in lowering borrowing costs. And making foreign investment in Australia more appealing for risk adverse investors. => this then has other linkages to such things as FX, employment etc etc but I'm not focused on those ... Which could be the shortfall in my understanding/interpretation.

Where I am focusing on is ... Really, the AAA rating is directly related to borrowing cost for govt ... But has morphed to become a proxy for govt economic management / performance.

Local business doesn't directly benefit from Australia's AAA rating ... Indirectly, banks and others with the size sufficient enough to look for international financing options could lift their rating by association ... ie Australia has a sound economic environment and therefore lower risk so the Co looking for finance is at lower risk versus other Co from lower rated economy ... But they won't gain a AAA rating unless their stand alone financials and history warrant?? Is this right?

Eg, Toyota is AAA rated, but that's isn't because Japan is AAA rated?

Ok, this is the actual question:
Given the penchant for governments to want to run surpluses ... And not borrow for a multitude of reasons ... What the fuck is a AAA rating actually good for ... Now days?

Really what you want is a solid AAA so you can nation build and build infrastructure that produces a dividend, whether via economic multipliers or hard cash. You borrow to the hilt and hope your tax receipts pay it down in the allotted time frame ... Then hopefully your investment bears fruit via increased economic stimulus => employment => and tax receipts ... So you can pay down your debt, and reduce effective cost of debt via early payment ... Which then generates additional income streams augmenting tax receipts which you could then use to lower tax rates. All this then should further boost your credit rating thus feeding a cycle.

In the past, toll roads, energy generation, railways, ports, airports etc ... All would have been nation building assets funded by govt ... But with deregulation, and more free market economics and successive conservative governments ... Public investment / nation building got transferred from Govt to private sector so the Private sector could securitise and spin out assets and in theory build more cheaply, whilst employing more people.

So because of this shift towards budget surpluses and zero or minimal govt debt ... AAA ratings are near useless to the average Australian business or individual ??? Is that too big a reach?

Am I being to left leaning in my interpretation ?
Is the AAA rating benefiting me (individual or business) in other ways?
What am I missing.

Be interesting to see if any of you are still interested in this kind off topic shizzle ... This has been in my head for awhile now and no idea where I can discuss without going back to uni. Not really shuttle car banter either.
 

John U

MTB Precision
The global financial crisis was kicked off by a few triple A rated companies wasn’t it?
 

Oddjob

Wheel size expert
I work in a treasury so this is my bread and butter.

- AAA refers to the highest level of credit rating given to your debt.
- There are three main ratings agencies, with a fourth up and comer.
- It's possible to have a split rating, ie a different rating from different agencies.
- The rating has a direct impact on your interest costs. You will pay less interest if you are AAA as opposed to AAa etc. But this is relative and not consistent. Bond rates are set by markets and markets change. The primary bond market can also be very opaque.
- Corporate AAA is usually priced higher than government AAA. A coporate can't levy taxes by force after all.
- Day to day impact for a government is level of interest costs. Given that most government debt is long lived a change in credit rating can have a sudden and huge impact. Every dollar spent on interest is a dollar not spent on services, or conversely requiring higher taxes.
- More pernicious impact is being able to raise debt to fund infrastructure. A AAA rating means that bonds are usually oversubscribed when sold in the primary market. The lower the rating the harder it is to move bonds and the more you need to rely on bond underwriters like banks which gets expensive and eventually prohibitive.



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Oddjob

Wheel size expert
Also check out the ABS GFS statistics, particularly the balance sheet. All levels of government in Australia are run on debt, which is ok as long as the debt is used to fund capital investment. The problems arise when the debt is used to find recurrent expenditure. There are also other things the ratings agencies watch out for like structural deficits. Check out one of their websites for more info.

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scblack

Leucocholic
Another factor of the AAA rating is WHO can buy your debt. Many agencies, municipalities or other investment entities are unable by their charter to buy debt rated lower than AAA. So if you get rated lower than AAA, it limits your options to raise funds. Then it gets harder and more costly to raise your money - over and above the simple interest rate charge alone.
 

Robb

Likes Dirt
I work in a treasury so this is my bread and butter.
- The rating has a direct impact on your interest costs. You will pay less interest if you are AAA as opposed to AAa etc. But this is relative and not consistent. Bond rates are set by markets and markets change. The primary bond market can also be very opaque.

Sent from my SM-G900I using Tapatalk
This was shown when S&P cut the US rating - 'In fact, Treasuries have rallied this week, driving the yield on the benchmark 10-year note to 2.34 percent, its lowest level in about 10 months.' https://www.reuters.com/article/us-usa-debt-downgrade/united-states-loses-prized-aaa-credit-rating-from-sp-idUSTRE7746VF20110806

One other factor is the impact it has on other financial assets, as something like a 10 year Bond is used as a discounting rate / risk free rate proxy.
 

Ultra Lord

Beanie Fitment Specialist
Yes o_O

50/50 split nerf’s a pole sitter or the old blokes on here can converse above layingmens....... i’ve never been so invested in a threads outcome before....... C’mon pole!!!!
 

Nerf Herder

Wheel size expert
Sorry ... My pole is getting pumped as usual

Cheers on the mechanics ... That's prolly part one of where I am

That Reuters link if anything kinda reenforces to me that AAA has become more a measure of Political Risk, rather than actual Paymemt risk ... Not as if the US has defaulted on any payments since that change (11years ago)

I know the US has had a couple of govt stoppages in that time for both Obama and more recently Trump ... Which I guess is that structural debt ? Or recurrent expenditure ? So I guess, the ratings change was capturing that?

Thinking further ... The ratings agency is making a political risk assessment linked to likelihood of payment risk, which is why it's become a political performance measure.

The thing I'm lost on is Budget surplus ... But I think I'm assuming zero debt ... But it's debt payments below receipts, not zero debt, ... So there is still a cost of debt component impacted with a ratings downgrade ... Similarly, I now realise there is flow on impact to business and consumer lending via the major banks as there is obviously a local domicile component to their credit rating, and if their cost of debt increases so does ours.

ok more shizzle to think about. Cheers peeps
 

Calvin27

Eats Squid
Given the penchant for governments to want to run surpluses ... And not borrow for a multitude of reasons ... What the fuck is a AAA rating actually good for ... Now days?
The conspiracy theorist view is it's designed to keep governments in order.
 

richie_gt

Likes Bikes and Dirt
The global financial crisis was kicked off by a few triple A rated companies wasn’t it?
Not directly, the main problem was bad debt re-birthed over and over again until it got to AAA rating, loopholes in the American financial system.
 
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