A Curious Data Point - Net foreign debt approached $1 trillion, but does it matter?

Mon, 01 Feb 2016  |  

This article first appears on The Adelaide Review website at this address: https://adelaidereview.com.au/opinion/net-foreign-debt/ 

---------------------------------------

A Curious Data Point

Net foreign debt approached $1 trillion, but does it matter?

In the mid-1980s, the major sovereign debt rating agencies downgraded Australia’s credit rating in large part because of the large and growing level of net foreign debt.

Back then, net foreign debt was breaking above $100 billion for the first time, which was just over 30 percent of GDP. This was seen to be making the economy vulnerable to an external shock, especially if creditors suddenly demanded their money back, which would result in a currency crisis and skyrocketing interest rates.

Of course, there was no such problem given the reforms of the Hawke and Keating governments. Over the past 30 years, Australia has had only one major recession and that was 25 years ago when the rest of the industrialised world also slumped into a deep recession. It had nothing to do with foreign debt.

Fast-forward to today and the recent data shows that Australia’s foreign debt has hit a record high. At the end of September 2015, net foreign debt stood at $993.8 billion or some 61 percent of GDP. The release of what in years gone by would have been a shocking result did not get any coverage in the media, including the financial press. It had no impact on financial market trading and looks to have disappeared into the Australian Bureau of Statistics archives as a curious data point.

The question is, should it matter that net foreign debt is almost $1 trillion and over 60 percent of GDP?

The short answer is maybe.

One reason why it has slipped off the radars of markets and policy makers alike is the fact that the debt servicing costs are very well contained. This is because global interest rates are so staggering low. It is easy to make the interest payments, even with a high level of debt, with short-term global interest rates near zero and long-term bond yields generally near two percent. In other words, two percent on $1 trillion is easier to manage than five percent on $500 billion.

Where a problem may emerge with $1 trillion debt is if, or when, global interest rates materially rise. At the moment, there is very little chance of higher rates in the Eurozone and Japan, while any interest rate rises in the United States and the United Kingdom are likely to be moderate and slow to materialise. This is why there are few concerns. But a scenario where interest rates were to, say, rise to even half of pre-Global Financial Crisis levels, and there would be a substantial addition to Australia’s debt servicing burden and the net income deficit of the current account would widen sharply. If commodity prices stayed low or were to weaken further at this time, it would spell a major problem for the economy.

The other issue, which still lingers as a reason why foreign debt may yet turn into a problem, is a tightening of credit. This showed up during the 2008-10 Global Financial Crisis when borrowers restricted their lending and investors sold assets to build up their cash holdings. When financial and banking problems emerge, as they do every decade or so, banks, investors and many corporations simplify consolidate their investments and balance sheets causing pain for those with high debt levels.

Those low probability risks aside, the build up in foreign debt has helped to underpin Australia’s remarkable economic expansion. The capital in flows from debt have generally been used to fund investment, including housing, and have been an essential element in the 24 years of recession-free economic growth since 1991.

The end point of all of this is that the high and growing level of net foreign debt presents some risks for the economy, but they are not so large to cause any serious concern at the moment for policy makers or markets. But at the first hint that the servicing of that debt starts to challenge the Australian economy, most probably from a structural rise in interest rates, the issue could quickly move back into focus.

comments powered by Disqus

THE LATEST FROM THE KOUK

CLIMBING THE COVID MOUNTAIN

Wed, 29 Jul 2020

TEN ECONOMIC STEPS THAT FORM A PATHWAY TO THE TOP

THEKOUK and EVERALDATLARGE OUTLINE A WAY FOR THE PEOPLE OF AUSTRALIA TO CREATE AND MAINTAIN SUSTAINED PROSPERITY

Covid19 has opened a door for Australians to positively accept significant changes that will lead to a shared good. This rare opportunity enables us to achieve sustainable economic and social goals that create a new ‘normal’ as our way of life.

These Ten Steps are presented as non-partisan recommendations to the Australian Parliament in the firm belief that, if they embrace them, the Australian economy and society will be greatly enhanced after the Covid19 pandemic has passed.

*A job for you if you want one.
A significant increase in part time and casual employment can be created that will enable you to enjoy a more creative and peaceful lifestyle and to live longer and better. The traditional age at which you would have been expected to retire will become obsolete as a result. An access age for pension and superannuation will become your choice. This will enable you to remain in paid work for as long as you want to, on a basis that you choose, while boosting the productivity and growth of Australia.

*You will get wage increases that will be greater than your cost of living.
A demand for enhanced innovative skills at all levels of employment will be created as the economy grows in strength, thereby enhancing your stature in the workforce and enabling executive salaries and bonuses to drop to levels that are accepted as justifiable by employees, shareholders and customers.

The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

Tue, 07 Jan 2020

This article first appeared on the Yahoo Finance web site at this link: https://au.finance.yahoo.com/news/the-governments-test-in-2020-220310427.html   

---------------------------- 

The misplaced objective of the government of delivering a surplus, come hell or high water, has gone up in smoke

For many people, the cost of the fires is immeasurable. 

Or irrelevant. 

They have lost loved ones, precious possessions, businesses and dreams and for these people, what lies ahead is bleak.

Life has changed forever.

As the fires continue to ravage through huge tracts of land, destroying yet more houses, more property, incinerating livestock herds, hundreds of millions of wildlife, birds and burning millions of hectares of forests, it is important to think about the plans for what lies ahead.

The rebuilding task will be huge.

Several thousands of houses, commercial buildings and infrastructure will require billions of dollars and thousands of workers to rebuild. Then there are the furniture and fittings for these buildings – carpets, fridges, washing machines, clothes, lounges, dining tables, TVs and the like will be purchased to restock.

Then there are the thousands of cars and other machinery and equipment that will need to be replaced.