Victoria has been stripped of its AAA credit rating in a move that could cost the state more than $10 million a year.
Ratings agency S&P downgraded the state's credit rating by two notches from AAA to AA on Monday, citing a weaker fiscal outlook.
"The lowered rating reflects our view that the COVID-19 pandemic has dealt Victoria a severe economic and fiscal shock that has materially weakened its credit metrics more than domestic and international 'AAA' and 'AA+' rated governments," S&P said.
The agency said the Victorian economy had been affected more than any other state or territory due to its second wave of COVID-19 and subsequent 112-day lockdown.
It also pointed to the state's 2020/21 budget, which forecasts debt will soar to $154.8 billion by 2023/4 - about 28.9 per cent of the size of Victoria's gross state product.
"In our view, the Victorian government's path to fiscal repair will be more challenging and prolonged than other states because of the significant increase in debt stock projected over the next few years and the state's more limited flexibility to repair its balance sheet through asset sales and some degree of uncertainty about the government's policy position with respect to expense management," S&P said.
The agency had warned both in August and November that there was a "one-in-two likelihood" it would lower Victoria's credit rating.
Treasurer Tim Pallas told a budget estimates hearing last week the government was putting the interests of Victorians "first and foremost".
"Whether or not we keep a AAA credit rating is beyond my control. But we will continue to manage our budget in a AAA-rated responsible approach," Mr Pallas said.
Treasury Secretary David Martine said interest would increase between $1.9 million and $10 million a year if Victoria's credit rating was to drop to the second-highest level of AA+.
He did not forecast what a drop to AA would cost the state.
