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Michael Thompson: Welcome to ask Fear and Greed when we answer questions

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Michael Thompson: about business, investing, economics, politics and more. I'm Michael Thompson

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Michael Thompson: and hello, Sean Aylmer.

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Sean Aylmer: Hi, Michael.

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Michael Thompson: Sean, today's question, all right, it comes about because of

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Michael Thompson: the election campaign, which is in the final stretch this week. Right,

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Michael Thompson: and we heard over the last couple of days that

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Michael Thompson: Australia's triple A credit rating could be under threat due

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Michael Thompson: to the big budget spending measures, all of the promises

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Michael Thompson: that really both sides making. And it begs the question.

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Michael Thompson: You hear it and you see it in the headlines.

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Michael Thompson: You see the triple A credit rating? What is a

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Michael Thompson: credit rating? When it comes to this, what is the

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Michael Thompson: triple A credit rating? Who issues it? What does it

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Michael Thompson: actually mean if we get downgraded to double A or

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Michael Thompson: another rating altogether? What's that actually mean?

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Sean Aylmer: You just want to talk about bonds, don't you? I

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Sean Aylmer: do want to talk about bond, Yes, it's all about bonds, ah,

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Sean Aylmer: credit ratings? Yes, So what is a credit rating? It's

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Sean Aylmer: basically there are three big credit agencies Moodi's, S and

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Sean Aylmer: P and Fitch. They come out and say the value

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Sean Aylmer: of your debt is triple A, double A, B plus

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Sean Aylmer: whatever are they generally aligned? Generally not always, but generally

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Sean Aylmer: why it matters, The higher your rating, the lower your

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Sean Aylmer: borrowing costs. So if you have one hundred billion dollars

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Sean Aylmer: in debt, the amount that you pay on that debt

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Sean Aylmer: is determined by the ratings agency. So triple a rated

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Sean Aylmer: debt that will pay less coupon rate, less interest to

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Sean Aylmer: the super fun to borrow who's leaning the lending the money?

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Sean Aylmer: Then like a double B or something like that.

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Michael Thompson: Then I don't want to I don't want to preempt

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Michael Thompson: where you're going. But I'm now curious, then why would

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Michael Thompson: you be downgraded? Is it because the size of your

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Michael Thompson: debt is growing and growing and growing, and therefore there's

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Michael Thompson: concerns over your ability to service that Debt's the what

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Michael Thompson: are the factors?

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Sean Aylmer: Sounding like an economist, how.

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Michael Thompson: About that it's only taken me four and a half

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Michael Thompson: years to start picking up all of these terms and

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Michael Thompson: to use them now, Sean.

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Sean Aylmer: Yeah, I like a confidence. So basically, if they look

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Sean Aylmer: at the plus and minus of your balance sheet and

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Sean Aylmer: your ability to repay. Now, the thing about government debt,

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Sean Aylmer: so we're talking about Australia's debt, they call that sovereign

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Sean Aylmer: debt is that Australia can ask people for more taxes,

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Sean Aylmer: so their ability to repay. Australia's ability to repay is

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Sean Aylmer: greater than the Commonwealth banks. For example, Little Ane, a

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Sean Aylmer: very small company, So it is all about it's not

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Sean Aylmer: so much about the economy and how that's performing, it's

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Sean Aylmer: about your ability to repay. If Australia was downgraded, it

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Sean Aylmer: would certainly cost us money, and occasionally we talk about

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Sean Aylmer: being downgraded, and that's what's come out SMP in the

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Sean Aylmer: last day or two about them talking about downgrading. But overall,

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Sean Aylmer: at the moment, when you've got a triple A rating,

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Sean Aylmer: anyone from around the world combine Australian government bond and

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Sean Aylmer: be pretty confident that they're going to get their money back. Interestingly,

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Sean Aylmer: there's not all that many countries in the world with

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Sean Aylmer: a triple A rating, so you think the US would

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Sean Aylmer: have a triple A rating. Actually it actually doesn't, so

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Sean Aylmer: there's a bit of debate. And it was SMP who

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Sean Aylmer: have them at double A plus rather than triple A.

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Sean Aylmer: So I've got the list of triple A rated companies Australia, Canada, Denmark, Germany, Luxembourg.

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Sean Aylmer: Obviously clearly Netherlands, Switzerland, Norway, Sweden are there in Singapore

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Sean Aylmer: is also the European countries basically plus Singapore, Canada and Australia.

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Michael Thompson: And also it's not just national governments, it's also state

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Michael Thompson: based governments because I remember you often see reporting on

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Michael Thompson: state governments credit ratings, and I think there are only

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Michael Thompson: a couple of state governments in Australia that actually have

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Michael Thompson: a triple A credit rating at WA and the Act right,

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Michael Thompson: New South Wales Queensland have double A plus. Yes, so

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Michael Thompson: I mean it really does kind of flow the whole

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Michael Thompson: way through.

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Sean Aylmer: Right, Yeah. And you know we talked about junk bonds, yes, yes,

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Sean Aylmer: so I think they were double B plus there. Anything

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Sean Aylmer: under a double B plus was a junk bond, and

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Sean Aylmer: they're now called high yielding bonds. We don't talk them

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Sean Aylmer: jump junk bonds anymore. We're doing more high yielding bonds. Yeah.

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Sean Aylmer: But the funny thing is that ratings agencies make the

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Sean Aylmer: world go around because they actually determine the cost of debt.

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Sean Aylmer: In the global financial crisis, many of them were really

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Sean Aylmer: criticized because they had great ratings on organizations that really

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Sean Aylmer: struggled to repay their debt, including Bearings Brothers, which is

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Sean Aylmer: no longer with us. So a lot of focus on

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Sean Aylmer: ratings agency is a lot of responsibility. And if Australia

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Sean Aylmer: was to go from a triple A to a double

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Sean Aylmer: A plus, that would actually cost us significantly.

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Michael Thompson: I was just reading about the new South Wales government

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Michael Thompson: just as an example, because I mentioned that they were

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Michael Thompson: double A plus and that's.

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Sean Aylmer: Not a triple A but you're okay double A yeah.

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Michael Thompson: Because it was well, funnily enough, depends on which ratings

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Michael Thompson: agency you go to, Moody's triple A, Fitch, triple A

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Michael Thompson: S and P double A plus.

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Sean Aylmer: How dare they scandalous? Right?

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Michael Thompson: Fascinating? And that the lowest are slightly different depending on

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Michael Thompson: kind of where you which which one c at Moody's,

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Michael Thompson: d AT S and P and d at Fitch just

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Michael Thompson: feels alarmingly inconsistent.

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Sean Aylmer: It does. And remember this we're talking about governments and

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Sean Aylmer: state governments, but this is corporates as well. Yeah, and

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Sean Aylmer: so the world rolls around these ratings agencies.

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Michael Thompson: I don't think I've ever been so excited about.

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Sean Aylmer: Well anything, anything and bond markets.

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Michael Thompson: What have you done to me? Oh this is a distressing, Yeah,

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Michael Thompson: it is all right, well, thank you, Sean. And remember,

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Michael Thompson: if you've got your own question that you would like

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Michael Thompson: us to answer it, it can be anything. It can be

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Michael Thompson: about bonds, it can be about politics, or investing or relationship.

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Sean Aylmer: I'm happy to get it.

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Michael Thompson: I still haven't had a relationships question of your God,

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Michael Thompson: I would love one.

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Sean Aylmer: Yeah, yeah, I'm with you. Please send one in.

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Michael Thompson: Yeah, send it in via LinkedIn, which is obviously the

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Michael Thompson: place where you submit relationship concerns, or Facebook or Instagram,

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Michael Thompson: or go to our website Fear and Greed dot com.

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Michael Thompson: Today you and popular question in and we will get

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Michael Thompson: to it very very quickly. I'm Michael Thompson and this

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Michael Thompson: is Ask Fear and Greet