Australia's credit rating cut to negative

A formal S&P ratings downgrade is likely to follow for Australia. Photo / File

This is what happens when you don't pay your bills.

Australia is one step closer towards losing its coveted triple-A sovereign credit rating, with ratings agency Standard & Poors downgrading its long-term outlook from stable to negative due to "growing fiscal vulnerabilities".

The last time Australia lost its triple-A rating was in September 1986, when both Moody's and S&P downgraded to AA1, and then again in August 1989 to AA2. Australia didn't regain its triple-A rating until August 2002.

AMP Capital chief economist Dr Shane Oliver warned over the weekend that Saturday's inconclusive election result would likely result in a ratings downgrade.

"It's no great surprise," he told news.com.au. "After the election the writing was on the wall. We're now looking at a worse run of budget deficits than we saw when the rating was last cut in 1986.

"We're facing years of slippage in return to surplus and the messy election result points to more slippage, regardless of who wins."

Dr Oliver said other ratings agencies would likely follow suit. The outlook downgrade is effectively a "credit watch" ahead of a possible future downgrade.

"I thought they would either put us on watch or downgrade us, so obviously they're putting us on watch and giving themselves more time to think," he said.

A country can remain on a negative outlook for up to two years without being formally downgraded, Dr Oliver added.

"But I suspect it's probable that a formal downgrade will follow unless the new government is able to hold the line on the budget deficit projections which will be hard given the likely state of the Senate."

The Australian dollar fell slightly on the news from around 75.3 US cents to around 74.7 cents, but has since recovered to around 75 cents.

The New Zealand dollar rose 0.3 per cent against its trans-Tasman counterpart in response to ratings agency Standard & Poor's lowering Australia's credit outlook from stable to negative.

At 3pm in Wellington, the New Zealand dollar was trading at 95.00 Australian dollars, a rise of 0.3 cents.

Standard & Poor's says Australia has retained its AAA rating for now, but warned the negative outlook reflected its view that without the implementation of more forceful fiscal policy decisions by the government, budget deficits may persist for several years with little improvement.

S&P argues that last weekend's double-dissolution election, which has so far yielded an inconclusive result, may mean further fiscal consolidation is postponed.

Mitchell McIntyre, senior corporate foreign exchange dealer at NZForex in Auckland said the downgrade was not unexpected after the election,"Everyone knows the problems that Australia is facing. Commodity prices have been slammed over the last two years. It puts their external trade position in almost dire straits compared to what they were used to. It's no surprise they've moderated their outlook, it's almost just a wonder they haven't done so sooner".

McIntyre added that the dip in the Aussie had been pretty short-lived and have been viewed as a buying opportunity by many in the market.

- additional reporting from BusinessDesk.