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Fitch Affirms Australia at AA+, Notes Housing Risk

Fitch Ratings affirmed Australia’s credit rating at the second-highest grade with a stable outlook, while noting potential risks to the nation’s economy from debt and property prices.

Australia’s ratings are supported by strong public finances, “underpinned by: long-standing fiscal prudence; a relatively robust recent macroeconomic performance, in part reflecting the authorities’ ability to implement discretionary policy stimulus; and some of the strongest public institutions and governance among Fitch-rated sovereigns,” Fitch said in an e-mailed statement.

Fitch kept the rating at AA+, the same level as Hong Kong and one grade below Singapore, noting Australia’s household debt to disposable income ratio rose to 159 percent in mid-2010. “This issue has been magnified by downturns in housing markets in a number of countries, including Ireland, Spain, the U.K. and U.S.,” it said in the statement.

“The ratings remain constrained by Fitch’s concerns regarding a build-up of macro-prudential risks relating to a long-running boom in the housing market, and the high level of net external indebtedness, which is largely held by the banks,” said Art Woo, director in Fitch’s Asia-Pacific Sovereigns team.

Commonwealth Bank of Australia and Westpac Banking Corp., the nation’s two biggest mortgage lenders, have refuted warnings of a bubble in the housing market, saying supply constraints, a lack of speculative buying and income growth will keep prices from falling. By contrast, Gerard Minack, developed markets strategist at Morgan Stanley, has said prices are as much as 40 percent overvalued.

Fitch said that while its “research suggests that the banking sector looks well prepared to cope with a sharp decline in housing prices, should it occur, this type of downside shock, particularly if accompanied by an economic downturn, would have a negative impact on Australia’s financial system.”

Fitch’s Banking System Indicator assigned Australia a score of B, suggesting the country’s banking sector falls into the “high quality” category, it said.

The agency also affirmed Australia’s short-term foreign currency issuer default rating at F1+ and country ceiling at AAA.

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