SYDNEY--Australia's state government credit ratings are under increasing negative pressure and a downward move on some borrowers is likely in coming months, said an analyst at Moody's Investors Service. "We're certainly seeing negative credit pressures building, and South Australia and Tasmania are the weakest among our Aaa rated Australian states," said Debra Roane, senior credit officer, sub sovereign group in Moody's. "We're talking about maybe one notch adjustments, in some cases." State government's across Australia are suffering declining tax revenues linked to weaker consumption and soft property markets. Some of the country's biggest states--including New South Wales and Victoria--have pledged to implement steep sending cuts and shed public sector workers in an effort to shore up their finances and hold onto their cherished Aaa rating. Ms. Roane singled out South Australia's decision to drop planned spending cuts as a clear threat to their triple-A stamp. "We certainly see downward pressure in South Australia as they have moved away from a plan to really control expenditures," the credit analyst said. South Australia has already been stripped of its AAA rating by Standard & Poor's Ratings Services who cut the borrower to AA+ in May. Describing New South Wales as one of the stronger triple-A rated state governments, helped by its promises to rein in spending, Ms. Roane said Queensland's state budget in September will be a key test for the newly elected government. Queensland lost the top tier rating in 2009 and a new centre right government said it will cut borrowing and spending in an effort to avoid any further downgrade. Moody's rates the coal rich state at Aa1. "They have the flexibility to turn that situation around but political will is what it comes down to. If we don't see a response there then I think we would probably take a very hard look at that rating," Ms. Roane said. Foreign demand for securities issued by Australian states has lagged that of the federal government, though officials say offshore buying is increasing as investors seek out triple-A rated debt amid a declining pool of top rated borrowers. Write to Enda Curran at enda.curran@wsj.com
