Australia to Borrow as Much as $300 billion

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The annual budget deficit that results from next month’s budget is probably going to come in around 5% of GDP, which is not bad compared to 12.3% in the U.S. or 12.5% in the U.K. But it’s going to be around $50 billion. And remember, just over a year ago, you were looking at a surplus of $22 billion. A $72 billion one-year swing in Australia’s public sector finances is an impressive accomplishment by the Rudd government, but probably not one it will be campaigning on next time around.

In February the government raised its borrowing ceiling from $75 billion to $200 billion. Last week, Finance Minister Lindsay Tanner said the bleak IMF report highlighted the big revenue gap in Australia’s budget. He said Australia might have to raise its debt ceiling to $300 billion.

This is the nice thing about being a sovereign government. A household cannot arbitrarily vote itself the power to go deeper into debt. Households are at the mercy of their creditors. This either forces households to live within their means, or forces lenders to be more discrete with their loans.

A sovereign government generally doesn’t face the same kind of restrictions on its ability to borrow. The only real restriction is that it doesn’t much up its public finances so badly that creditors begin to demand higher interest rates. Or even worse, turn their back altogether.

Granted, Australia’s funding needs look pretty modest in the global scheme of things. But the question we ponder to start the week off is whether the Rudd government can trash the country’s credit rating even more quickly than anyone expected.

Australia’s triple A credit rating could indeed be at risk, according to an article in the Sunday Age. S&P sovereign risk analyst Kyran Curry says his agency is watching Australia’s current account deficit to determine if the government is borrowing more than it should. He says the current account deficit shows both Australia’s need to import capital and the effects of declining export revenues (an even larger deficit).

He wasn’t ringing any alarm bells just yet. But it was pretty clear what he meant. “We believe this Government will develop a credit exit strategy to stabilise its fiscal (budget) position in the medium term…But if the balance sheet weakened (the current account deficit), combined with a further weakening in the fiscal position (the budget deficit), that could bring some pressure on the rating.”

“Pressure on the rating,” means higher borrowing costs for the government in the future. That makes all sorts of financing more expensive, and exposes Australia’s big vulnerability, its reliance on foreign capital to grow the domestic economy.

So how big would an annual deficit have to get before the ratings agencies downgraded sovereign Aussie debt? “It is believed a deficit of $60 billion or more could prove a trigger point for ratings agencies to re-think the outlook, which would lead to higher interest rates and a bigger taxpayer-funded public interest bill,” the Age concludes.

David Uren in the Australian writes that it could come sooner than you think. “The crunch point for government borrowings will be reached in 2010-11, when government bond issues totaling $17 billion fall due, compared with just $6billion in 2009-10. This would potentially lift the financing requirement in that year to well above $70 billion, requiring the Treasury to issue bonds at a rate of more than $1.3billion a week.”

The job of borrowing $1.3 billion a week from the rest of the world falls on the shoulders of Andrew Johnson, the Chief Executive Officer of the Australian Office of Financial Management (AOFM). Good luck to him on that.

Mr. Johnson gave a speech in Sydney last week called, “Australian Government Debt in a Changed Financial World.” In that speech he said, “If we were to continue our current pattern of bond issuance at the rate of $1 – 1.4 billion per week, this would provide $48 -$ 67 billion over the course of 2009.” He then showed a chart to prove it.

Source: www.aofm.gov.au

Let’s be clear, we’re not saying the AOFM is going to have trouble selling this much Aussie debt. Some of it will be bought domestically by super funds. Some will be bought by European and North American financial institutions. And some will be bought by the Chinese we reckon. One clear result is that non-residents will end owning a larger piece of Australian government bonds than ever before.

Source: www.aofm.gov.au

Maybe it’s good that foreigners want a piece of Aussie debt. Maybe that means the place remains attractive to foreign capital. And maybe it means the government can run even larger deficits in the coming years without paying substantially higher interest rates. But maybe it also means the Aussie dollar is headed down soon.

Over to Alan Kohler at Business Spectator who writes that, “International investors will not buy Australian government debt at a yield of 4.7 per cent and an exchange rate of 70c/70¥, when debt levels are at the point where a negative rating watch is likely, if not an actual downgrading.” Alan predicts/suggest that the Reserve Bank ease the government’s borrowing pain by lowering the cash-rate to two percent by June 30th.

It’s just over two weeks until Wayne Swan has to present his budget. But we’d expect currency and share markets to start putting the pieces together before then. The weaker Aussie dollar ought to be a bonus for the Aussie gold price (and investors in gold shares). Meanwhile, another big question is whether the share market can keep up its recent run.

You know our take on it by now. Deleveraging and liquidation have a long way to go. There are many more housing-related losses to take for U.S. and European banks (not to mention emerging market debt). Governments are trying to spend their way out of it, and in the process they’re jacking up tax rates to soak the rich.

Bottom line? The plan to borrow and spend our way out of the recession isn’t going to work. The results of the stress tests for U.S. banks are due the first week in May. But the bigger stress test is going on in the bond markets right now. It’s a stress test for sovereign governments in the U.S., the U.K. and here in Australia. Who’s going to pass and who’s going to fail? More on that tomorrow.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. S&P are the lovely people that gave CDOS AAA ratings, like we should realy listen to them!

    Rex connor can help raise some funds for AOFM

    Reply
  2. Yikes.

    Maybe the land of oz can woo the Japanese housewives back?

    Well, I haven’t seen Leaky Laurie in a while, you know: the man whose glass is always half empty? “The Aussie dollar is strong now and this is bad for Australia because … “Our dollar is down and this is bad for … ” etc.

    So — having watched Oz$ clawing toward parity and then dropping 40% in, what, three months? I ask, shouldn’t we now be raking in export dollars? I watched copper bottom out and then start to inexplicably rise … and the penny dropped with the news that China was buying big and warehousing.

    And they’re buying big in gold, according to some, and keeping their domestic output as well. The land of oz should be getting a piece of the action, and with other exports as well.

    Reply
  3. China are covering their currency with Gold re DR be it slowly. Isn’t there too much $US bond issue it is going to be the next toxic finance when all nations holding the US$ and using it for their own currency via bond issue……… when the US$ falters our own $AU bonds (& assets) are held by the Asian creditors we still have to pay up on the bond maturities?

    Meanwhile US is humming along with its business as usual approach, ie greed is good, God is an American, etc. US can use their currency to maintain fortress America and pay back their bond maturities with $US…they own the $US printing presses……we all like it or lump it….the basis of total power corrupting absolutely…….So what if the $US can only function in the US……no on sells to the US, so what, a reverse protectionism…..’hey not our fault’ the US says ‘we tried and everyone knew what we (US) were doing’.

    Ok Aus let’s look at what real assets you have to swap re DR “International investors will not buy Australian government debt at a yield of 4.7 per cent and an exchange rate of 70c/70¥, when debt levels are at the point where a negative rating watch is likely, if not an actual downgrading.”

    The light at the end of the tunnel is an indebted national sovereignty. Aus hands over its unused land and the Commonwealth is relegated to NSW & maybe Qld for wiping of all debt and the issue of new reserve currency……….questions: how much issue does Aus get for its land?…….does the Aus ‘new deal’ become a stimulus package for the world economies in dire debt?…….won’t we need a close friend and ally to assist us in the brokerage of this ‘new deal’ someone with experience in ‘new deals’………….

    Charles Norville
    April 27, 2009
    Reply
  4. Re: Wreckless spending and debt dependency of western governments. Looking back through history dont all good things (great empires) come to an end through similar means. You know your in trouble when the citizens of such nations are generally unconcerned about the whole fiasco. Many people have been conditioned to live beyond their means for decades. But then maybe inflation will save the goverments who control natural resources but its just too bad for average citizens who mainly own wealth in forms which will be diminished by, or which wont respond to this coming type of inflation ie respectively cash and real estate.

    Reply
  5. Well, we need to get the Govt and its opposition to read DR, there are a lot of other web sites too, some that also debunk the CO2 tax (in truth)……they need to listen and have forums to listen to the people….. the industrial revolution started at the same time that Aus was taken over by England….Aus has tasted the threat of invasion by armed hostility in WW2 maybe the rules have changed and not a shot will be fired when this relatively empty place is declared Terra Nullius again, a divided nation that once again has no ability to defend it self from a more superior technological takeover…..

    Aus is a nation where the core business of its economy is houses and importing people with little skills to fill them.

    I think the history has already been determined and the books have been written……..

    I think there only way is for the Govt to nationalise all public super and fire sale overseas super assets, reduce all current public super to 60K max, that includes judges, pollies, PS – then invest in a defence manufacturing industry that has spin off to new technologies ie nanotechnology, to make use of our high energy materials per capita ratio (and keep it that way). Let’s fight for this nation Australia.

    Charles Norville
    April 27, 2009
    Reply
  6. 300 billion

    mmm

    that’s 300 with 9 zeros after it, right?

    the population is about 21 wth 6 zeros, correct?

    so my accessory menu calculator tell me that’s over $14,000 per soul

    but that’s every soul Lukewen, every newborn babe, every octogenarian, everyone

    Remember Lukewen, a Jedi’s strength flows from the Force.

    But Lekewen…Yes. A Jedi’s strength flow from the Force, but beware of the Dark Side.

    You must unlearn what you have learned. Once you start down the dark path, forever will it dominate your destiny, consume you it will…

    can you feel the Force ageing, Lukewen?

    You must feel the Force around you. Here, between you…me…the skilled migrant intake…the rock…everywhere!

    Luminous beings are we, so Lukewen, what is this wet blanket on the fertility rate of the Force?

    Like a picture of you in my bedroom, Lukewen.

    Help you I can, yes.

    But first, learn the albatross a stork is not.

    Reply
  7. Like Dan, I am wary of presumptions any country can spend its way to prosperity. Yes, I heard of Keynes. But even JM Keynes noted that economics had to be a learning process, not one based on dogma.
    Incidentally, if I criticised S&P for their credit watch record, it would be for gullible leniency, not strictness.
    If this Aus recession is supposed to be based on ‘The Global Down-Turn’ then how can we expect to go against international trends, and recover independently? If it is all the world’s fault, we might just as well sit and do nothing, waiting for the big ones to lead, rather than incurring fiscal massive debt.
    I thought capitalism was based on productive investment, not spending beyond your means.
    Prognostications of recovery sound like so much wishful thinking. I only wish I could afford wishful thinking.

    Reply
  8. Hello All,
    Wish to ask,who does Australia borrow money from and at what rate of interest.

    Thanking you
    Robbie

    Reply
  9. who does australia borrow money from?

    Micheele Bayley
    October 8, 2010
    Reply
  10. I just read this article. Did our economy get a downgrade in 09-10? I think we made it through the GFC without a recession..

    Reply

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