Hockey chafes at Australia’s debt straight jacket


Ironically, Joe Hockey is on a mission to New York to increase Australian debt:. From the AFR:

As Treasurer Joe Hockey prepares to travel to New  York to meet his budgetary masters at rating agencies Standard & Poor’s and Moody’s, he faces a real challenge.

Can he convince these powerful institutions that have more influence over government than any lobbyist or voter that a new debt strategy he is considering is a good idea?

On Friday, The Australian Financial Review reported that Hockey was “mulling” the idea of separately classifying debt the federal government raises to invest in infrastructure projects from the debt required to finance the budget deficit.

Such a dramatic shift in the government’s thinking has been greeted with scepticism. Before the election campaign, it swore blind that it would cut Australia’s debt levels at all cost. Now, Hockey seems to suggest that it would be reasonable for it to borrow to rebuild infrastructure such as roads.

The article goes on to argue that Hockey will draw a distinction between good debt and bad debt. The former being the self-liquidating kind that is repaid via improving productivity. And that Hockey will aim to split the debt into on and off balance sheet categories. The article concludes:

Either governments finance projects directly by paying the lowest possible cost of financing but wearing the debt load on their books, or the funds are raised at arm’s length with no recourse to the government.

The debt isn’t the responsibility of the ­government, but the debt providers charge a higher cost of funds to compensate for the risks, which must be paid for in higher charges on the public patrons of the asset.

Says Plank [from Deutsche]:  “Debt is debt, no matter what you call it”.

As usual, what the article does not mention is why ratings agencies are so uptight about Australian public debt in the first place. It is because the public balance sheet still implicitly guarantees the bank’s huge offshore borrowings. That provides a material  two-notch upgrade to bank ratings. To maintain this, CRAs have said that the Budget must return to surplus “across the cycle” and have repeatedly warned that they are also concerned about how Australia will fund itself when private sector credit growth rebounds, meaning that they expect a clean public balance sheet to offset any risk in growing private debt.

Labor juggled these limits by consistently promising fictional surplus dates and endlessly pushed them out, the latest to 2016-17. But there is a limit somewhere and for Hockey to materially ramp up his borrowing he needs to know where it is.

Its’ pretty odd flying to New York, however. He could just place a phone call like I do when I want to talk to the CRAs. The analysts are quite accessible. Either he has other reasons to go, wants a holiday, has the training wheels on, or is going over somebody’s head.

My guess is the CRAs will not have good news for big Joe. That means the likely outcome is further entrenched inflationary forces as the public user-pays through its nose for new roads that have not been thoroughly vetted economically.


  1. “Its’ pretty odd flying to New York, however. He could just place a phone call like I do when I want to talk to the CRAs. The analysts are quite accessible. Either he has other reasons to go, wants a holiday, has the training wheels on, or is going over somebody’s head.”

    Probably attending a wedding.

  2. Do the analysts sign off on adjustments to credit ratings themselves? If not, why waste time trying to ingratiate yourself with them?

    I’m backing the ‘going over somebody’s head’ scenario as my base case. Whether or not he enjoys New York in Autumn is secondary at best.

  3. Would this be the same S&P who in court earlier this year stated that no one should believe their ratings are independent and objective, instead they are just a marketing tool?

    Might be a good idea for him to meet them on that basis, he should take someone from the DRBA with a briefcase of money to help with the negotiation and we can have whatever rating we pay for.

  4. What the hell!! Is this same guy who, as shadow treasurer railed against NBN being “off the books”?

    Now he is off to New York with a begging bowl. While he is there, he might as well put in a good word with the IMF. Who knows, if our ponzi housing bubble bursts, our banks by proxy, will need an IMF bailout.

  5. Says Plank [from Deutsche]: “Debt is debt, no matter what you call it”.

    That is a spectacularly ignorant comment, coming from a banker.

    Not all debt is the same. There is an important dfference between recourse debt and non-recourse debt.

    It is odd that Joe Hockey is slowly (actually rather quickly) coming around to the idea of issuing what in the US would be called “revenue bonds” as opposed to “general obligation bonds” which are guaranteed by the general taxation revenue of the state.

    Revenue bonds have recourse only to the revenues of a specific project or projects. If the project cannot meet its debt service obligations, then the interest may be capitalised until such time as it can. Or the bondholders take a loss.

    In some cases (such as the French Caisse Nationale des Autoroutes which I described last week) the non-recourse debt of several geographically diverse projects may be consolidated into a single issuer, thereby giving extra spread of risk, greater liquidity, and lower borrowing costs.

    None of this is new. In the early 1990s, I and some of my colleagues at Schroders urged the state governments to adopt precisely this “semi-private” approach to road finance.

    For anyone who is interested I refer to “Public Equity, Private Debt. The Efficient Financing of Roads”, presented to the Australian Automobile Association Land Transport Infrastructure Symposium in Canberra on 22 March 1994. They may still have a copy in their library.

    For our pains we were effectively black-banned from having any role advising state governments on toll road projects. The main roads departments of some of the Australian states were absolutely determined to give away the equity ownership of toll revenues to private tax farmers.

    Had they listened then, the various states would have retained control of a vast tolling revenues supporting non-recourse revenue bonds which could now be used to provide seed capital for road projects beyond Joe Hockey’s wildest imaginings.

    • Stephen
      Do you have a copy you can post to scribd ? I suspect the copy submitted in 1994 is gathering dust in a locked box in an immense warehouse reminiscent of the final scene of Raiders of the Lost Ark.

      • I have a hard copy sitting right in front of me which I can scan. But how does one send it to scribd?

      • All done.

        Public Equity,Private Debt. The Efficient Financing of Roads. Schroders Australia Limited. Presentation to Australian Automobile Association Land Transport Infrastructure Symposium, Canberra. 22 March 1994.


        An Alternative to Build-Own-Operate-Transfer Financing of Roads. Presentation to Australian state road authorities. Schroders Australia Limited. 17 March 1993.

        Of course, it’s all 20 years too late.