Thursday, November 10, 2011

External Indebtedness - Australia in Bad Company

Australia has one of the worst Net International Investment Positions in the developed world at -61% of GDP in 2009 according to the Bank of Japan. (1)

Could we face action by "bond vigilantes" in the same way as Italy? 

Our position (2) is worse than:

Country Year % of GDP
 United Kingdom 2009 -13.1
 United States 2009 -17
 South Korea 2009 -17.8
 Sweden 2010 -22.2
 Italy 2010 -24.3
 Slovenia 2010 -35.1
 Mexico 2010 -36.5
 Brazil 2009 -37.5
 Kazakhstan 2009 -38.1
 Turkey 2009 -44.9

However we are in a better position than:

 Poland 2010 -63
 Slovakia 2010 -66.4  
 Estonia 2010 -71.8
 Greece 2009 -83.1
 New Zealand 2009 -90.1
 Spain 2009 -93.6
 Ireland 2009 -97.8
 Portugal 2009 -108.5

Is a position better than Poland and Slovakia but not as good as Kazakhstan and Turkey sustainable?

Is a position of 4 times as much net international investment as a percentage of GDP as the US and UK sustainable? And for how long? And can we allow our current position to deteriorate further? 

 In a world of "bond vigilantes" perhaps we need to examine our vulnerability. We have seen a number of myths exploded over the last few years:
1. House prices don't fall
2. Banks don't get bailed out,
3. Bank debt to foreigners doesn't matter of itself.
3. Western developed countries are immune to sovereign debt concerns.

While we have the benefit of being an issuer of our own currency (and can print and "quantitatively ease") to our heart's content, that doesn't help where our debt is denominated in foreign currencies, or we want to borrow more money from foreigners (remember the "Belgian dentist?).

We also have the benefit of low sovereign debt, but our states, while generally well rated, have large pension obligations under old defined benefits schemes many of which are indexed for inflation. The states can't issue currency and therefore need to fund these pensions over time as our demographics (dependency ratio) deteriorate.

The Federal Government has already had to guarantee some of our major banks borrowings from overseas which are needed because of the historically poor savings rate over the period from about 1995 to 2007.

Remember that European and US banks are likely to have to raise hundreds of billions of dollars in additional capital over the next say 5 years, or sell assets to reduce balance sheets. In those circumstances, will those banks increase lending to Australian Banks or to Australian governments wishing to fund welfare such as health, education, unemployment and retirement benefits?

Will international banks wishing to accept additional Australian exposure simply lend only to those major resource projects with undoubted export markets such as energy projects and not into general pools of funds in banks unless they are guaranteed by the Federal Government? Might foreign banks only fund their own major companies and their projects in Australia?

Could we face a foreign debt capital strike? Or increased yield requirements?

How can our policy makers address this position without causing a recession, higher unemployment, falling house prices and possibly a bank failure or two?

1. See Table 5 on page 10 of
2. See Wikipedia: Net international investment position

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