Banks’ offshore bond issuance hits all-time high

The Australian Bureau of Statistics (ABS) recently released its National Financial Accounts for the June quarter, which revealed a 0.5% quarterly rise in Australian banks’ gross external liabilities (offshore borrowings), but a 0.6% decrease over the year.

Bonds (+$8 billion), Loans (+$7 billion) and Other (+$5 billion) drove the quarterly rise in offshore borrowings by the banks over the June quarter, partly offset by an $18 billion fall in One Name Paper:

Over the year to June 2019, Australian banks’ offshore borrowings fell by $6 billion, with falls in One Name Paper (-$36 billion) and Deposits (-$10 billion) outweighing rises in Loans (+$22 billion), Bonds (+$10 billion) and Other (+$10 billion):

The growth in bank offshore borrowings over recent years has been driven primarily by Bond issuance, which hit an all-time high $421 billion in the June quarter:

When compared to GDP, Australian bank offshore borrowings fell to 45.6% of GDP in June, 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 was 197.6% of GDP as at June 2019, well down from the peak of 211% 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.

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), the next global shock arrives (which is looking more likely), or there is 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.

Leith van Onselen

Comments are hidden for Membership Subscribers only.