How does USA's new debt ceiling affect property owners in Australia?
October 21, 2013 2:56 PM   Subscribe

What should Australian property owners and potential buyers be wary of in regards to USA's credit rating going down?

Without thinking hard about it, I suppose a generic outcome would be economic uncertainty and interest rates coming back up.

If you could confirm and/or flesh out the reasons why we should or should not be worried that would be helpful!

Sydney, Australia is my primary interest, any other location/country would be welcome.
posted by gttommy to Work & Money (9 answers total)
Best answer: People here in America can't even figure out how to deal with it. In Australia? Forget about it. Go on with life and don't worry about our dumb-ass politicians.
posted by COD at 3:40 PM on October 21, 2013 [2 favorites]

Best answer: Without thinking hard about it, I suppose a generic outcome would be economic uncertainty and interest rates coming back up.

This is indeed not thinking too hard; if there is economic uncertainty, the reserve bank in Australia will lower interest, not raise it, in order to stimulate borrowing (and growth, hopefully). However, interest rates are insanely low now (not as insanely low as other parts of the world, but for Australia, historically they are very low indeed), and the reserve has indicated that they are seeing some stimulatory effects from all the drops, and unlikely to ease further unless it's really called for. A minor drop in rating (from AAA to AA+, for example) is most definitely not really calling for it. (An actual default would be a radically different kettle of fish, but is unlikely to happen now or in the future, and frankly if it does, the ratings agencies will be the least of our worries).

More broadly, I think your question both a) overstates the effects of a minor drop in credit rating, and b) the likelihood that the ratings agencies would actually, meaningfully drop the rating in the US.

Ratings agencies are a wonderful exercise in lending credence to what everyone is saying and can already see. They did not predict the SE Asian crisis in the nineties, the dot com crash, the Iceland crash, and the GFC. They predict the future about as well as you can drive a car by looking in the rear view mirror. They are a useful justification for neo-liberals with neo-liberal policies, and they have a tremendous conflict of interest in that much of their funding comes from the finance industry and those with a vested interest in hearing particular narratives at a particular time.

tl;dr Ratings agencies are one of the more useless indicators of fiscal health going. They are post-hoc, and appeal primarily to politicians looking for something to say that only takes five seconds and adds a veneer of truthiness to they are trying to sell. They also make catchy headlines.

If you're asking what genuinely bad economic news from the US would do to Australia, it would definitely put us into recession (we are only just skating by without being in one atm), and would likely push our currency higher as the AUD is heavily speculated, and people would be looking for somewhere to put their money away from USD, at least temporarily. This would be bad economically, cause we need a low dollar so people buy our shit. The impact on property, however, would be relatively low. The market would slow down in the short term, sure, but we are not in a property bubble in any sense like what the US would be in. There would be no burst, rather an arrest in growth, or perhaps gradual deflation. Which shouldn't matter, because only a mug buys property as a short-term speculative venture. You just wait out until conditions are better.
posted by smoke at 4:11 PM on October 21, 2013 [2 favorites]

worry about your rising summer temps and big fires. worry about your deadly fauna, spiders, snakes, jellyfish, crocs. don't worry a whole lot about the american debt limit. it's essentially inconsequential in the overall scheme of things.
posted by bruce at 4:22 PM on October 21, 2013 [2 favorites]

I should say, "the US was", rather than "would be in".
posted by smoke at 4:23 PM on October 21, 2013

Our credit rating went down in August 2011, after the last debt ceiling crisis. Did it have much of an effect on your economy then? For us in the USA, I don't think it was very noticed by the average person. There's no way to tell for certain, but it will likely be similar this time around.

Personally, I'm more concerned about the next time we near the ceiling than this potential downgrade.
posted by smalls at 9:01 PM on October 21, 2013

One effect I've already noticed both here in the US and in some other countries is that the potential US default has intensified apocalyptic fears, creating opportunities for canny investors to make money selling remote farmland or things like overpriced "preparation kits" of ordinary canned food and bottled water to certain market segments.
posted by StrikeTheViol at 9:03 PM on October 21, 2013

Mod note: Spider derail removed, please do not get re-entangled in its web. Focus your comments on answering the question please, thanks.
posted by goodnewsfortheinsane (staff) at 4:27 AM on October 22, 2013

Best answer: Well, first of all, the talk about credit rating downgrades basically came before the US Congress forged a deal and the President signed it. In other words, we weathered the crisis which the credit rating downgrade was intended to flag. I wouldn't expect another threat of changes to the US credit rating until February, when the next potential crisis point is now shoved off until. In fact, the "new debt ceiling" actually improves the outlook rather than worsens it -- Congress has simply agreed that we can spend the money that has already been budgeted (by itself). With the ceiling raised, there is no crisis, no shutdown, and no credit downgrade.

Second, it's important to realize that the credit rating downgrade was largely related to the question of whether investors in US bonds, essentially (there are other complexities), believe the US will fulfill its obligations to them. If you look at the auction price of T-bills, however, they barely blipped. This is a phenomenon -- dubbed 'bond vigilantism' -- whereby investors will supposedly signal worry about a US default by bidding up the prices in anticipation of interest rate increases -- that has been predicted by many critics of the US public debt overhang, but hasn't actually appeared yet. (Paul Krugman took a strong stand on this point and thus far has been proven correct, but -- gong gong gong -- there's always the future.) In short the US financial situation is stable, at least until early next year, and any turmoil is now more likely to come from an external source such as some sort of international crisis or further slumping in the EU.

If you'd asked this question a week ago I'd have said it was unlikely to directly affect you much, and right now it's almost entirely moot. The US is not now in a position to default on its debt obligations for the foreseeable future, and in fact may be less likely to face such a crisis as it proved a very unpopular chess move for the Republican Party.

Ultimately the uncertainty reflected in the markets was pretty much about whether the Republicans would use this tactic rather than any more abstract question about having all this debt.
posted by dhartung at 4:08 PM on October 22, 2013

Best answer: generic outcome would be economic uncertainty

The ANZ released a document justifying their mortgage rate process. They do pay attention to international capital market conditions. If there is economic uncertainty, then international borrowing costs go up, but as smoke pointed out this would be counterbalanced by the RBA lowering domestic rates.

Absent generic economic uncertainty, the impact of a minor US downgrade on bank borrowing costs would be too small to determine, but I imagine it would probably lower the Big Four's borrowing costs; if the US Government and the Big Four are competing to borrow from the same pool of funds, then a reduction of the US's credit rating should increase the relative attraction of lending to the Big Four. The Big Four then dutifully pass on these lower borrowing costs to their mortgagors.

genuinely bad economic news from the US would... would likely push our currency higher as the AUD is heavily speculated, and people would be looking for somewhere to put their money away from USD, at least temporarily

In the immediate term, the opposite would probably happen; if there is a big shock, everyone liquidates their AUD in favour for USD. Here's what happened during late 2008. Can you guess which six month period I was lucky enough to spend in the US?
posted by kithrater at 4:10 PM on October 22, 2013 [1 favorite]

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