Friday, February 26, 2010

The debt thing once again

Crikey's Glenn Dyer and Bernard Keane have an interesting response to Barnaby Joyce's latest muddle headed thinking on debt. "Barnaby reveals Coalition debt debacle — will heads roll?"

Once again Barney Joyce, the Opposition’s finance spokesman, has shown himself to be completely unaware of Australia’s debt position, its composition and why it exists.
His rant/ramble in this morning’s Australian - so sublimely silly that even Dennis Shanahan couldn’t muster any enthusiasm for it - confuses privately-held foreign debt (it is large) with public foreign debt (not much at all).
“The net foreign debt is about $638 billion. It is one of the highest net debt to gross domestic product ratios in the developed world,” Barney wrote.
The alternative Finance Minister fails to appreciate the background to our foreign debt and how it has grown, especially over the past decade or so, with a tripling under the Howard Government, of which his leader Tony Abbott and putative Treasurer, Joe Hockey, were ministers. Indeed, Hockey’s first Ministerial position was Financial Services.
They should all head to the quarterly balance of payments figures from the Australian Bureau of Statistics which give detailed information on our foreign debt, gross and net. It’s called our net international investment position. The latest edition is due for release next week.
The ABS figures show that net foreign debt was $192.3 billion when the Howard Government won office in the March quarter of 1996; by the September quarter of 2007, just before the Government lost office, it had ballooned to $577.17 billion.
Three times its 1996 level.
That was accompanied by an entirely coincidental dropping of the issue from Coalition rhetoric.
Under the Abbott doctrine of ministerial responsibility (Peter Garrett application), Mr Abbott and Mr Hockey should therefore take responsibility for this explosion in our foreign debt.
Most of this foreign debt - in fact the overwhelming proportion of it - is private foreign debt raised by companies large and small, from our big banks, to BHP, to CSL, to Caltex, down to smaller companies with trade finance arrangements in place offshore.
Australia cannot “default” on this debt. Only the holders of that debt can default. Senator Joyce seems to have no understanding whatsoever of that crucial point, nor do other critics.
Some holders of that foreign debt have already defaulted or rescheduled, without damaging Australia’s credit standing. Going back 25 years, the likes of Bond Corporation and Bell Resources had foreign debts that were renegotiated, written down after those companies collapsed. Likewise with groups such as Allco Financial Group, Babcock and Brown and its various groups have failed and the holders of that foreign debt have had to endure losses.
And the Centro duo, the Retail trust and the Properties arm, have renegotiated billions of dollars of foreign debt that have involved the holders either taking losses or converting their debt into equity.
In fact, Joyce’s ignorance seems to extend to the recent history of the Australian financial system, especially the collapse of groups like AFG and B&B and the debt rescheduling by the Centros (and GPT, which was in a big European joint venture with B&B).
Ratings agencies are well aware and are unconcerned because they can differentiate between private and public debt. Australia’s Triple AAA rating has been maintained. The rating was actually lifted to its current high level during the Howard Government’s huge expansion in debt.
Why didn’t Dennis Shanahan, point any of this out in his commentary on Barney’s ramble?
In his column, Barney quoted David Gruen of Treasury as saying our debt was very high. Barney obviously missed this comment from the same David Gruen in a speech in Sydney last Friday where he made a very telling point about the ‘quality’ of our foreign debt:
As I have noted, Australia’s current account deficit reflects high and rising investment – and, in particular, investment to expand the capacity of the traded goods sector. This distinguishes Australia from most other countries with large current account deficits. In the United States and the United Kingdom, for example, rising current account deficits since the mid-1990s have reflected falls in the national saving rate, with the rate of investment being broadly unchanged.
In other words, money we owe the rest of the world has been invested in productive assets and in creating wealth in the future, unlike the US and UK where it was used to finance housing and current consumption (some in Australia has been used for that purpose, but not the majority).
Barney doesn’t understand that point: we are borrowing from offshore to invest in assets (Gorgon LNG, iron ore mines, gold mines, infrastructure, Queensland coal seam gas) that will generate income in future years to both meet the interest cost and repay the debt.
We can pay our way. There is rising concern that the likes of Greece might have trouble doing so on a continuing basis. That’s why there’s a tinge of default about these countries, and not about Australia.
Barney apparently doesn’t get that, either out of political calculation, or plain ignorance.

While I agree with much of this article, the authors seem to accept a growing myth perpetrated by policy-makers that all of this foreign debt build up is productive …

A good deal of foreign debt has been borrowed by the banks and lent to Australian households to bid up the price of houses.

This can be considered as productive (see Christopher Joye’s view of these things) but it could also be seen as unproductive. A household debt to disposable income ratio of 160 makes households very vulnerable to a period of low growth and rising unemployment. Although we have just had a big test of our vulnerability, there is still the potential for rising private debt to be a problem. Especially if it continues on its upward trajectory.

Just what level of froeign and household debt would be unsustainable?

It’s also the case that rising public debt throughout the world may increase competition for funds and the need to cutback on spending to pay off public debt could also cause problems. As Wayne Swan might say” We can see the light but we’re not out of the woods yet”.

But the authors are correct in highlighting the policy line in Australia that the real problem now is dealing with the politics of prosperity rather than the politics of vulnerability. This seems to be a return to the complacency of 2007-08.

I love the irony of mainstream liberal economists having so much faith in the communist leadership of China to ‘manage’ such a complex political economy.

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