The Queensland Commission of Audit report released yesterday contains a solid analysis of the risks facing the budget, some of which are highly probable (e.g. a blowout in the cost of the Commonwealth Games), and some of which are remote. A risk that I see as remote, but which is obviously exercising minds in the Queensland Treasury Corporation, is the risk that another financial crisis means investors shun Queensland Government Bonds, as noted in the Commission of Audit report (p. 25):
In the current fragile and volatile financial market environment, government debt raising can become very difficult at reasonable rates and conditions without a AAA credit rating. Queensland’s large ongoing funding requirement continues to be challenging, and Queensland has experienced increasing difficulty in accessing funds from international capital markets…
…Queensland has a very large program of bond maturities over the period to 2016 relative to other large states, and therefore faces a sizeable task in ‘rolling over’ existing Government bonds, even before sourcing new funds.
The risk of funding drying up for Queensland is very remote, however. If State Governments have difficulty borrowing money, as they did during the 2008 financial crisis, the Commonwealth Government would no doubt again step in to guarantee State debt or, in the worst case, borrow on their behalf. And as noted at Loose Change last week, investors have actually shown a healthy demand for Queensland Government bonds recently:
So while there is a risk here, it’s very remote, and the best rationale for bringing down our debt is to restore our AAA credit rating to reduce our borrowing costs, which are around 30-40 basis points higher than other States (see p. 24 of the Audit report).