US downgrade may raise borrowing costs for start-ups

The United States’ credit downgrade could push up borrowing costs for Australian companies, resulting in a major blow to start-ups seeking American finance.


Last week, US-based financial services company Standard & Poor cut the US credit rating from AAA to AA+ for the first time in 70 years, sending financial markets into a tailspin.


Concerns about the downgrade have sent stock markets in Australia and Asia to their lowest levels in more than two years.


Almost $100 billion was wiped from the Australian sharemarket on Friday last week, which has since been dubbed “free-fall Friday”.


Myer chief executive Bernie Brookes told The Australian the debt downgrade could lead to higher borrowing costs for Australian companies that secure funds out of the US.


“Generally, people will be loath to provide further leverage to companies, so we’ll see a higher cost of debt as funds are less available,” Brookes said.


“It’s another dent in the consumer psyche that the retail sector really doesn’t need.”


“Everybody keeps saying the fundamentals of the market are good, but if you have the best house in the street and the street goes down in value, so does your house.”


“We’ve got one of the better economies at the moment, both from an employment and interest rate perspective, but we’re getting dragged into the mire of what’s happening overseas.”


CommSec chief economist Craig James says risk-averse lenders could demand higher interest rates from all borrowers in the wake of the downgrade.


“If borrowers around the world are worried about the investment environment, they may want a higher risk premium, which will see interest rates creep up,” he says.


“On the other side of the equation, Australia is still AAA-rated, so they might not push our borrowing costs up as much as for some others.”


Matt Sherwood, head of investment market research at investment services group Perpetual, agrees it is possible Australian banks will be forced to pay more to borrow from the US.


“The cost of banks obtaining short-term finance is going to increase. They will undoubtedly be passing that onto US consumers and to US businesses,” Sh erwood said in a statement.


“The flow-through effects to the Australian consumer and our corporate sector… is a bit more complicated but it is certainly possible.”

“It will really depend on what happens to bank funding costs here in Australia and whether banks decide to pass those funding cost changes onto consumers or not.”


Haig Kayserian, founder and chief executive of Australian-run New York angel fund Kayweb Angels, doesn’t believe start-ups should “alter their course” too much in light of the downgrade.


“If they are B2B, I expect this new wave of commentary surrounding the S&P downgrade will lead to freaking more and more people out, therefore they should expect later payments and come up with suitable safeguards internally,” Kayserian says.


“If they are B2C, I don’t expect too much change in Australia as 5% unemployed still means they have 95% of the population to choose from as customers.”


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