As credit tightens, Aussie banks binge on offshore bonds

By Leith van Onselen

The Australian Bureau of Statistics (ABS) has released its National Financial Accounts for the September quarter, which revealed a 1.8% quarterly decline in Australian banks’ gross external liabilities (offshore borrowings), but a large 7.6% increase over the year.

One Name Paper (-$24 billion) and Deposits (-$10 billion) drove the quarterly decline in offshore borrowings by the banks over the September quarter, partly offset by a $9 billion rise Bonds and a $4 billion increase in both Loans and Other:

Over the year to September 2018, Australian banks’ offshore borrowings rose by $62 billion (+6.8%), with Bonds (+$44 billion) and Loans (+$14 billion) driving the rise:

The surging growth in bank offshore borrowings over recent years has been driven primarily by Bond issuance, which has hit an all-time high:

This appears to be a response to rising short term funding costs so is not all bad. That said, it will lift funding costs as well.

However, when compared to GDP, Australian bank offshore borrowings fell to 46.9% of GDP in September, well below the December 2015 peak of 52.8% of GDP, but exactly the same as the pre-GFC peak. They also remain a key driver behind the banks’ loan books – mostly mortgages – which also retraced to 197.2% of GDP as at September 2018, but was well down from the peak of 211.2% of GDP in June 2016:

As argued ad nauseum on this site, Australia’s banks would never have experienced anywhere near the same degree of asset (loan) growth without this tapping of 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.

The banks’ heavy reliance on offshore borrowings to pump housing has also contributed to the long standing rise in Australia’s net foreign debt, which was 55% of GDP in the September quarter of 2018, albeit down from a peak of 62% of GDP in June 2016:

As always, the key risk for Australia remains that the banks’ ability to continue borrowing from offshore rests with foreigners’ willingness to continue extending them credit. This willingness will 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 material deterioration in the Australian economy (raising Australia’s risk premia).

The Federal 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. Unfortunately they haven’t. They have instead been used to pump-up the value of unproductive houses:

This malinvestment is at the heart of Australia’s ponzi economy.

And with credit now tightening with the banking royal commission, the whole system will be tested.

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Leith van Onselen

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