The release of the Australian Bureau of Statistics (ABS) National Financial Accounts yesterday revealed a large $33 billion (5%) jump in Australian banks’ gross external liabilities (offshore borrowings) in the December quarter, with borrowings now at all time record levels.
This surge in offshore borrowings was driven by increases in One Name Paper (+$17 billion) which is debt under one year maturity, Bonds (+$13 billion) and Deposits (+$10 billion), partly offset by falling loans (-$7 billion), as shown in the next chart:
In the year to December 2014, bank offshore borrowings jumped by $56 billion (8%) to a total outstanding balance of $737 billion on the back of increases in One Name Paper (+$21 billion), Bonds (+$19 billion) and Deposits (+$16 billion):
You can see that offshore borrowings have rocketed over the past two years commensurate with Australia’s surging house prices. They are now at record levels in raw terms, but under pre-GFC highs as a ratio to total liabilities and loans (see next chart).
The surging growth in offshore borrowings has been driven by an equal mix of bank bond issuance, growth in offshore deposits and one name paper, note as well that all reversed sharply in the last global shock:
When compared to GDP, Australian bank offshore borrowings are nearing their pre-GFC peak. They stood at 46% of GDP as at December 2014, just a whisker below the peak of 48% recorded in September 2008 (see next chart).
You can also see from above that offshore funding has been a key ingredient behind the banks’ growing loan books – mostly mortgages – which hit a record 196% of GDP as at September 2008.
Indeed, Australia’s banks would never have experienced anywhere near the same degree of asset (loan) growth without this access to offshore funding markets. Accordingly, the total value of Australian mortgage debt would never have grown so strongly, and Australian house prices would be materially lower as a result.
And if you are wondering why Australia’s net foreign debt is so high, look no further than the banks’ heavy reliance on offshore borrowings to pump housing (see next chart).
The danger in all this is that the banks’ ability to continue borrowing from offshore rests with foreigners’ willingness to continue extending them credit. This willingness could be tested in the event that Australia’s sovereign credit rating is downgraded (automatically downgrading the banks’ credit ratings), there is another global shock, or a sharp deterioration in the Australian economy (raising Australia’s risk premia).
The Budget, too, is now hostage to the banks’ offshore borrowing binge as it cannot borrow to spend on infrastructure or other initiatives for fear that Australia will lose its AAA credit rating, potentially leading to an unraveling of the private debt bubble created by Australia’s banks.
Of course, all of this would be far less of a problem if these borrowings were used by the banks to fund productive investment. But they aren’t. They were used instead to pump-up the value of unproductive houses (see next chart).
It’s a case of epic mal-investment that will cost the economy over the long-term: either through lower productivity growth or some form of banking crisis.