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?
Footnote
1. See Table 5 on page 10 of http://www.boj.or.jp/en/research/brp/ron_2010/data/ron1009a.pdf
http://www.boj.or.jp/en/research/brp/ron_2010/data/ron1009a.pdf
2. See Wikipedia: Net international investment position
http://en.wikipedia.org/wiki/Net_international_investment_position
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