FOREIGN DEBT: by Patrick J. ByrneNews Weekly
The unacknowledged elephant in the room
, February 20, 2010
Australia's huge net foreign debt leaves our banks vulnerable to further shocks, following the Commonwealth Government's end to the guarantee it gave to banks borrowing in the international financial markets.
In October 2008, the Rudd Government provided the banks a guarantee on borrowing in the international financial markets, which helped banks access credit following the global financial crisis.
Arguably, Australia's banks were among the safest in the world at the time of the crisis.
However, once governments in other countries decided to guarantee their debt-ridden banks, in the face a systemic collapse of their banking systems, Australia was forced to also guarantee its banks.
The government guarantee was needed so that Australian banks could continue to compete with other guaranteed banks around the world, so as to fund Australia's demand for capital.
The total borrowings of Australia's banks offshore amount to $827 billion, most of which has gone into financing the Australian housing market.
This borrowing by the banks makes up part of the $1,207 billion of gross foreign debt, which is the total borrowings by Australians overseas. The rest is owed to foreign lenders by Australian corporations and governments (see table below).
The problem for our banks and other borrowers is that some $441 billion of the total gross foreign debt matures in 90 days or less, and then has to be rolled over. That is, the banks have to be able to borrow repeatedly to refinance this debt.
In addition, they have to find another $60 billion a year to cover the current account deficit - the difference between what our nation earns overseas and what we pay overseas annually.
The banks, had they not received the government guarantee in 2008, could not have competed on the world markets; they could not have continued borrowing to roll over foreign debt and to fund the current account deficit.
They would have been downgraded to junk-bond status and the nation would have faced economic collapse.
Recently, there has been an apparent easing of the global financial crisis. Should the world improve and should China's mineral imports continue to keep the Australian economy growing, the Treasurer Wayne Swan's decision to remove the guarantee to the banks will be regarded as timely.
However, economics commentator Terry McCrann warns that, in the absence of the bank guarantee, further crises in the world economy will leave Australian banks highly vulnerable once again.
This is because the ability of Australia's banks to continue borrowing to fund debt-addicted Australians, he writes, "sits at the intersection of everything that will determine our economic and financial future", that is: "financial flows in and out of Australia, the value of the dollar, the impact of China, what happens to the US economy, domestic inflation and interest rates, property prices, economic growth and jobs." (Herald Sun,
Melbourne, February 9, 2010).
Is it any wonder that, last year, the leaders of some of Australia's biggest banks warned that Australia's reliance on foreign funding was no longer sustainable?
As McCrann goes on to explain, there is a real risk that if Greece defaults on its debts, this could have a similar effect to the failure of Lehman Brothers, and lead to another international financial meltdown.
Further, Australia's success is based squarely on supplying the raw materials needed by the fast-growing Chinese economy.
If China's economic growth slows or stalls, it will wreck international confidence in Australia, and damage the willingness of foreign lenders to continue feeding our debt binge.
If, simultaneously, Greece defaults and China slows, how does Australia fund its debt needs, let along start repaying its massive foreign debt? Only by sharply increasing interest rates, so as to continue attracting foreign capital.
The world is still on the edge of a financial precipice.
The global financial crisis has sharply exposed what News Weekly
has been warning about since the 1980s, that a burgeoning net foreign debt will leave the economy vulnerable in the event of an economic crisis. That crisis is now staring us in the face.
Further, News Weekly
has warned, that in the event of such a crisis, Australia could be forced to turn to the world's new lender of last resort to debtor nations, China.
In this case, Australia would be at serious risk of losing its sovereignty.Patrick J. Byrne is vice-president of the National Civic Council.