THE NEWS WRAP: Gillard government prepares public for budget deficits

Treasurer Wayne Swan has begun preparing the public for a deficit and possible future budget cuts, following a warning by the Grattan Institute the federal government faces deep structural deficits for many years ahead.

“Not only have the terms of trade fallen from their peaks, but the sustained high dollar and global headwinds have also hit profitability and contributed to subdued domestic price growth across the board,” Swan said.

“There’s no doubt this year’s budget is going to be brought down in some extremely challenging and unusual circumstances. The substantially weaker revenue outlook means we are going to have to make some very difficult decisions.”

Moody’s cuts QBE’s debt rating

Ratings agency Moody’s has downgraded its rating for insurance giant QBE from A3 to Baa1, citing natural disasters and low interest rates, ahead of around $1 billion in the insurer’s debt falling due over coming months.

“The downgrade of the rating primarily reflects the group’s weakened earnings, internal capital generation and debt service coverage measures, as well as QBE’s sustained elevated financial and operational leverage profile,” Moody’s analyst Alan Murray says.

“The group’s above-average aggregate worldwide catastrophe exposures relative to capital, and its recent adverse trends in reserve adequacy, are additional considerations.”

Qantas looking to strike deal with Latin American airline giant

Qantas is looking to strike deals with Latin American airline Latam, which was formed last year from the merger of Chile’s LAN and Brazilian airline TAM, citing its alliance with Emirates as a model for the proposed deal.

“[The LAN-TAM merger distracted] the very senior people that we need to talk to. We’ve got a very strong relationship there and we will talk over the next year or so,” Qantas International chief executive Simon Hickey says.

“[A deal] would be great but we would have to work out what is the art of the possible. It’s not just the regulator here but it’s the regulator on both sides.”

Overnight

The Dow Jones Industrial Average is up 0.1% to 14,567.1. The Aussie dollar is steady at US102.75 cents.