Stuffed Aussie banks retreat from offshore debt

By Leith van Onselen

The Australian Bureau of Statistics (ABS) yesterday released its National Financial Accounts for the March quarter, which revealed a 2.9% quarterly decline in Australian banks’ gross external liabilities (offshore borrowings), and a 0.2% decrease over the year.

One Name Paper (-$21 billion), Bonds (-$10 billion) and Deposits (-$9 billion) drove the quarterly decline in offshore borrowings by the banks over the March quarter, partly offset by a $10 billion rise in loans and a $4 billion increase in Other:

Over the year to March 2019, Australian banks’ offshore borrowings fell by $2 billion, with falls in One Name Paper (-$15 billion) and Deposits (-$8 billion) largely offset by rises in Loans (+$11 billion) and Bonds (+$10 billion):

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

When compared to GDP, Australian bank offshore borrowings fell to 45.7% of GDP in March, well below the December 2015 peak of 52.8% of GDP, and roughly the same as the pre-GFC peak. They also remain a key driver behind the banks’ loan books – mostly mortgages – which also retraced to 196.1% of GDP as at March 2019, 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 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 57% of GDP in the March quarter of 2019, 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).

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, which Australia’s authorities are desperate to reinflate.

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