Australia’s prized AAA credit rating is at risk due to a deteriorating federal budget and the country’s banks need to prepare for the fallout, the head of the government’s financial system inquiry says.

David Murray, who chaired the inquiry that handed down its report to the Abbott government in late 2014, warns the weakening state of the budget could lead to a ratings downgrade by credit agencies.

“The AAA rating of the Commonwealth is looking increasingly vulnerable, with little room to move,” he told the Australian Financial Review on Tuesday.

Treasurer Joe Hockey appeared to back Mr Murray’s comments, conceding in an interview with ABC Radio that Australia could lose its Triple A rating if it doesn’t rein in spending.

Mr Hockey said if the government didn’t get back to living within its means the risk to its credit rating would flow through to banks in the form of higher costs.

Meanwhile, in a speech on Tuesday, Mr Murray said a ratings downgrade for Australia would have a significant impact on the country’s big four banks: the Commonwealth, Westpac, ANZ and National Australia Bank.

Given Australia’s reliance on foreign capital and the perception of the government as a backstop for the major banks – in light of deposit guarantees given in the global financial crisis – any downgrade of Australia’s credit rating would have a flow on effect to the banking system, he said.


That could impact on the ability of the big four banks to withstand a financial crisis, prompting Mr Murray to reiterate the inquiry’s recommendation for banks to hold more capital.

“Capital should be set so that banks are unquestionably strong and the potential call on taxpayers are minimised to the greatest extent possible,” he said.

The comments by Mr Murray and Mr Hockey come after Deutsche Bank chief economist Adam Boyton warned Australian stood to notch up deficits for another decade.

In a research note, Mr Boyton said he did not believe the federal budget would return to surplus until the 2023/24 financial year.


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