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Australian issues, Economics, Governance

Who Owns Australian Government Debt?

By Dan Denning • May 8th, 2012 • Related Articles • Filed Under

feature photoDid you see the bit in yesterday’s Australian Financial Review about who owns Australian government debt? Amy Auster, the chief of staff for the CEO of Institutional Banking at ANZ wrote the following (emphasis added is ours):

‘…[There has been ] a big increase in holdings in Australia’s bond and foreign exchange markets by overseas investors, specifically official investors such as central banks and sovereign wealth funds in Asia, the Middle East, Europe and Latin America…They are by far the biggest holders ofAustralian government bonds, with an 85 per cent share of the $220 billion stock of commonwealth government bonds. Foreign investors’ holdings of bonds issued by the states – the $195 billion ‘semi-government’ bond market – is nearly 40 per cent, and the consensus is that official investors comprise a big share of these holdings.’

Hmm…if we’ve done our maths correctly, that means that commonwealth and state debt combined is around $415 billion, or around 27 per cent of GDP. Remember, a few years ago commonwealth debt was negligible both in nominal terms and as a percentage of GDP. The figures also show that 63% of government debt in Australia is owned by foreign creditors.

If you’re a debt optimist, these figures show that there’s plenty of demand for Australian debt. If you’re a debt pessimist, these figures show that Australia owes foreigners a lot more money now than it did three years ago. The government stimulus alleged to have prevented the GFC impacting in Australia wasn’t free after all.

If you’re a realist – you note the Australian debt is bigger than it once was and likely to get bigger still. And with people like Ken Henry, David Murray, and Jeremy Cooper advocating for a bigger, stronger, more liquid corporate bond market (one accessible to individual investors and superannuation funds) the debt market might even become accessible through the share market. This is the development we explored in the latest issue of Australian Wealth Gameplan.

It’s a shame that we have to talk about corporate bonds instead of equities. Corporate bonds are generally about capital preservation and risk aversion. Equities are about growth and capital appreciation. The fact that we’re talking about a retail corporate bond market tells you that attitudes toward risk are changing with performance of the stock market and with natural demographics (the retirement of the baby boomers).

And we’re talking about income investing because genuinely productive businesses are harder to buy in a stock market rigged by financial intervention.

Regards,

Dan Denning
for The Daily Reckoning Australia

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