Moody’s has announced it has cut the credit ratings of Australia’s four major banks as well as several regionals and former credit unions and building societies. The rationale behind the downgrades is macro-economic in nature and not particular to any one bank. That is, the downgrades are a function of Moody’s view of the Australian economy and what this may mean in future for banks operating within Australia. It was however relevant to institutions with mortgages on its books.
Moody’s was particularly concerned with low rates of wage growth and high levels of household debt associated with high dwelling prices. “Latent risks in the housing market have been rising in recent years, because significant house price appreciation in the core housing markets of Sydney and Melbourne has led to very high and rising household indebtedness.”
However, it is not a housing bust which concerns Moody’s. It is the effect on household spending should the unemployment rate or interest rates rise. Households with less savings and or more debt would be inclined to reduce expenditure as confidence levels fall. “The household sector’s resilience to weaker employment levels and/or rising interest rates has materially reduced.” In turn, a reduction in spending would flow to the rest of the economy and businesses and employees on the edge would topple over.
“Any increase in household sector stress would have the potential to weaken consumer confidence and consumption, creating negative second and third order impacts on overall economic activity and, accordingly, bank balance sheets.”