WITNESSES
STEVENS, Mr Glenn Robert, Governor, Reserve Bank of Australia
HYDEN, Mr Neil, Chief Executive Officer, Australian Office of Financial Management
Senator JOYCE—Does the amount of Australian borrowing—government borrowing—force
up the amount of interest rates and, if so, by how much?
Mr Stevens—I take it that we are talking about the rates that the government actually pays to
borrow at—
Senator JOYCE—And also by reason of the government’s involvement in the market.
Between the state governments and the federal government they were in there now for hundreds
of billions of dollars. How much effect is that having on interest rates in Australia or is it having
any effect at all?
Mr Stevens—I do not think that it is having a significantly large effect on the rates that they
are actually paying at their tenders. As I said earlier, the 10-year yield in Australia is in the bottom half of the fives, I think, at the present. These rates go up and down but that is not
materially different from the sorts of rates we have seen on average for a decade or so.
Senator JOYCE—Less than a per cent or more than a per cent or—
Mr Stevens—I think the effect, if any, is quite small. It is certainly not more than a per cent,
no—much less, if anything.
Senator JOYCE—Is there any extent of government borrowings where it does have an effect,
or are government borrowings irrelevant?
Mr Stevens—They are not irrelevant, but this is an area where over the years, in my memory
at least, the studies which try to pin this down empirically find a pretty wide range of estimates
and often they struggle to find much effect. I think that if we had much larger debt burdens, like
50 per cent of GDP or something like that, we would see a noticeable premium on Australian
debt reflecting that, but I do not really think that one can claim that there is a significant
measurable impact on these yields at present. These yields, presumably, embody the market’s
expectation of all the things that are ahead.
Senator JOYCE—Okay, say, 50 per cent of GDP. Now Australia’s GDP is about $1.2 trillion,
so we are looking at about $600 billion. Is that a fair analysis of what you are saying when you
talk about debt levels of GDP?
Mr Stevens—What I am saying is that with debt positions of 10 or 15 or 20 per cent of GDP,
the likely impact of that on the premium that our government pays over and above what other
governments would pay is likely to be pretty small. The most likely cause of a big rise in
government borrowing costs is the borrowing by other governments around the world. After all,
it is a global capital market.
Senator JOYCE—I am not looking so much at the premium of what we pay to other
governments, because other governments are in hock to their eyeballs as well. I am looking at
the effect on the domestic borrower in Australia by reason of the largest purchaser of money in
the economy being the Australian government. What is the percentage effect on them?
Mr Stevens—My point is that the Australian government borrows in a global market. There
are free global capital flows here and long rate in Australia is driven more strongly by what
happens in global markets than by what happens here, frankly, at the sorts of debt levels we are
talking about. If we were talking about much, much bigger debt levels that would be different.
But in prospects—
Senator JOYCE—You mentioned 50 per cent. Australia’s current federal debt is around $100
billion or $115 billion, and the states’ debt is heading towards quarter of a trillion dollars, so we
are heading way over $300 billion already in government debt—and, as you know, but others
need to be informed, the federal government has underwritten the states’ debts—so we are well
on our way towards having 50 per cent government debt.
Mr Stevens—I do not think that I agree with that.
Senator JOYCE—What is your view?
Mr Stevens—The 50 per cent anyway was a reference to federal general government debt—
Senator JOYCE—Just the federal government?
Mr Stevens—Remember the Maastricht Treaty that all the Europeans had to sign to get into
the Euro area? It was a matter of whether they could or could not meet it, and that was for debt
to GDP of 60 per cent. Actually, Australia would have walked in on that criterion had we been
part of Europe. So this is a world where we have got the G7 group gross debt to GDP going to be
100 per cent pretty soon. We have got countries like Japan at 140 or 150 per cent and a number
of countries in Europe not much different from that. We are talking about debt numbers for
Australia in gross terms and even if you do add the states in I would have thought it would be
significantly less than 50 per cent of GDP.
Senator JOYCE—But the budget position is for $517 billion, half a trillion dollars. We have
only got a $1.2 trillion economy. We are getting up there.
Mr Stevens—Hang on, what is the $517 billion? What figure is that?
Senator JOYCE—In the budget—and I have not got the papers before me because I am in
Christmas Island—the gross long-term liabilities were to the extent of half a trillion dollars by
2013 or 2014.
Mr Stevens—I am not familiar with what that figure represents. There is not much argument
that the state of the government accounts in this country is just so superior to virtually anybody
with whom we would want to compete.
Senator JOYCE—Going back to the international state of accounts: all the money that has
been borrowed obviously has to be repaid at some point in time. If we believe in the bona fides
and the benefits of the stimulatory effect of money being injected into the economy, what is
going to be the effect when all this money is taken out of the economy to repay the debt?
Mr Stevens—That is all built into the forecasts that people have. A certain, modest degree of
debt servicing has to be paid for by the government each year. It is pretty modest.
Senator JOYCE—Have you decided on any form of exit strategy for the government as to
how they are going to repay the debt?
Mr Stevens—The exit strategy is the long-term projections that they put out with the budget
that show the budget returning gradually to balance and then surplus and the debt ratio peaking
and starting to come down. That is the exit strategy. How do they get that strategy? I am not here
to defend—
Senator JOYCE—Is it a schedule of repayments or is it just some sort of amorphous,
nebulous basis that some time in the future the money will be repaid? Have you seen anything
concrete on how the money is going to be repaid?
Mr Stevens—When the budget goes to surplus you are repaying debt. That is what that
means. That tells you how that occurs. Of course, you could debate whether that will be
delivered on that schedule—we do not know. What they have set out there is the exit strategy.
Have I seen any other than that? No.
Senator JOYCE—Has there been any statement about peak debt or about when federal debt
will actually stop going up and start coming down?
Mr Stevens—That is the budget papers.
Senator JOYCE—Has anybody been decisive enough to implicitly state when that point will
be?
Mr Stevens—There is an estimate for that in the budget documents. I cannot recall what year
it is. It is some years out but there is a peak figure quoted in there and a year in which it occurs.
Senator JOYCE—Far enough out that we cannot be held to it in the short term is my
recollection of it.
Mr Stevens—That is inevitable.
Senator JOYCE—In relation to the stimulus payments, if a portion of the stimulatory effect
driven by the $900 cheques were compared with the effects of exports and export dollars, what
portion would it be?
Mr Stevens—The first round of payments—the ones in December, as I recall—was a little bit
under a percentage point of GDP—about 0.8 or 0.9.
Senator JOYCE—What was the percentage of GDP for exports in that same period?
Mr Stevens—Exports are about a fifth of the economy, but you have to work out here what
you think the counterfactual was. Exports did not really grow very much. The point about
exports is that they did not decline by from 10 to 35 per cent, like everybody else’s exports did.
That is the big point there.
Senator JOYCE—What portion of the economy’s GDP was exports?
Mr Stevens—It is routinely about one-fifth.
Senator JOYCE—About 20 per cent. So the effect of the stimulus was less than one per
cent?
Mr Stevens—The debate over the stimulus measure is that it was worth about eight-tenths of
one per cent of GDP. Did people spend it and, if so, how much of it and how soon?
Senator JOYCE—Eight-tenths of one per cent?
Mr Stevens—Yes, to growth.
Senator JOYCE—How is eight-tenths of one per cent at all responsible or quantifiable
against the massive effect of exports? How can a $900 cheque be responsible for putting one
tonne of coal onto a ship?
Mr Stevens—Senator, I think you are comparing things that cannot be compared. If I take the
level of exports—it may be 20 per cent of GDP—and it does not grow, then it has not
contributed to growth. If there is an impetus into the economy that is half a percentage point of
GDP then that contributed to growth in that quarter of half of percentage point, whereas exports
contributed no growth in that quarter.
Senator JOYCE—But a slight reduction in exports is likely to reduce exports by eight-tenths
of one per cent, and that would have a massive effect. Obviously, the economy is being driven
by exports, and three-fifths of five-eighths of hardly anything is what the effect of the stimulus
package was. If exports go down by eight-tenths of one per cent, which would not be much of a
change to the quantum of exports, then all the effects of the stimulus would be negated. That
goes to the next statement: how do you reckon we will go with an emissions trading scheme
which might do precisely that?
Mr Stevens—I have no comment on the emissions trading scheme. On the broader issue, it is
quite true that had a very large fall in exports occurred it would have meant a much weaker
economy than we have had. While I am not here to defend the stimulus package, I do not think
that means that the stimulus package either was infective or should not have been done. That
does not follow from that statement.
Senator JOYCE—It seems that the vast majority of the GDP is return on export dollars.
Shouldn’t there be a greater investment in what actually brings about those export dollars?
Shouldn’t that be a far greater investment in that than in what prospectively could have just been
the purchase of imported chattels—imported retail goods?
Mr Stevens—Actually, 80 per cent of our GDP is produced at home. It is not true to say that
most of the economy is a return on exports. A significant chunk of it is, but it is one-fifth, which,
by the standards of many other countries, is low. We are not that open an economy in
comparison to most in Asia or Europe.
CHAIR—Senator Joyce, we will have to go to Senator Xenophon now.
………………………….
Senator JOYCE—Mr Hyden, what is the amount of Australian government securities
outstanding in notes and bills?
Mr Hyden—I am trying to recall the most up-to-date figure. It is somewhat in excess of $100
billion.
Senator JOYCE—You do not have anything on where we are right now? I know it is in
excess of $110 billion.
Mr Hyden—I think that is right. We do put monthly figures on our website, but I do not have
the latest figures in my mind.
Senator JOYCE—Can you inform me what we have underwritten and what the state
government debts are at this point in time?
Mr Hyden—Again, I do not have the specific number in mind, but I have a general
impression of around $120 billion.
Senator JOYCE—I thought it was slightly more than that. I do not mean net debt but the
gross debt of the states.
Mr Hyden—That is my recollection of the gross debt. It may have changed a little due to
issuance changes.
Senator JOYCE—I know Queensland has got about $85 billion and New South Wales has
got about $60 billion or $70 billion, so it has got to be far in excess of that. I think it is around
$230 billion, but I just wanted to get close to it. What has happened to the yield on the bonds and
notes we are issuing? What is the yield return?
Mr Hyden—I think the yields on a debt have remained fairly stable over the last couple of
months. Mr Johnson may have some figures he can give you.
Mr Johnson—Currently a 10-year bond is around 5¼ per cent. That has increased by around
80 basis points since the budget time estimate. I assume that is the reference point you would
like.
Senator JOYCE—Is that the same comparative increase in yields in other key countries such
as Singapore, Japan or the United States, knowing that the United States is in a world of trouble
with debt?
Mr Johnson—Sorry, Senator, I do not know that one. Mr Hyden may.
Mr Hyden—The factors influencing interest rates in different countries are quite varied so we
do not attempt to follow those in detail. I do not think I can comment on how far the movement
and rates here reflect those overseas.
Senator JOYCE—So there is a differentiation in what changes in yield there are in Australia
to what happens overseas?
Mr Hyden—There are some factors which are applicable here and there are other factors that
are relevant in individual countries elsewhere. In particular, the relative strength of the economy
and the expectations about inflation and exchange rates can have an impact.
Senator JOYCE—So domestic policies in Australia affect our yield rate. We are not
completely at the behest of and the beck and call of international issues. What we do
domestically can affect the price of money in Australia.
Mr Hyden—Yes, and, in particular, what happens to Australia’s inflation and expectations
about inflation are important for the level of nominal interest rates in Australia.
Senator JOYCE—Mr Hyden, when do we expect the current $200 billion facility to be fully
drawn?
Mr Hyden—Which $200 billion facility is this?
Senator JOYCE—The $200 billion appropriation that we did in the second stimulus—in the
vote on the second stimulus. When do you expect that money to be fully drawn?
Mr Hyden—I do not have a specific projection on that, but it would, I think, take us into
about the year 2011.
Senator JOYCE—Roughly, how many billions are we drawing down a month now?
Mr Hyden—Currently about $5 billion a month.
Senator JOYCE—About $5 billion a month.
Mr Hyden—I am talking there essentially in terms of treasury bonds and treasury indexed
bonds, which we have not been issuing but we are currently planning to do so. The $200 billion
relates to the total amount of debt outstanding at any time. Our issuance of treasury notes can be
part of that but, as they are short-term instruments, it is really the change in the total volume of
notes that is relevant in that connection.
Senator JOYCE—Do you know what the comparative yield is on US notes at this point in
time?
Mr Hyden—I do not have that figure with me.
Senator JOYCE—With regard to the rating of Australian securities, how are we currently
rated? Where are we on the list of preferable purchase or preferable bond? I suppose that relates
to the rate.
Mr Hyden—We are rated by the rating agencies in their highest category, which is generally
labelled as AAA. Several of the agencies which have published analyses or commentaries on
how they regard and rate sovereign governments that are within the AAA category are tending to
put us towards the top ranks of those AAA-rated sovereigns.
Senator JOYCE—Can you give me an approximation of how many countries are in that
group and whereabouts we are in that—for example, No. 7 or 8 out of the first 10 or something
like that?
Mr Hyden—I am not sure that I can give you a precise number. I think there would be about a
dozen AAA-rated sovereigns that are substantial issuers of debt. We would be in the highest
group of those. Different rating agencies have different approaches or different commentaries as
to how they would group us, but they may put us in the top two or three or something like that.
Senator JOYCE—As to the expectation of rating agencies, do they look at your capacity to
meet as required your own sort of budget fundamentals of exit strategies on debt or your
capacity to run off debt, or is that not a big issue for them? Do they look at your capacity to
repay your debt?
Mr Hyden—The level of debt and the government’s ability to make the principal and interest
payments due on it are clearly a prime concern of any rating process. For AAA-rated issuers, it is
almost axiomatic that they regard us as having a very high capacity to meet those requirements.
They tend to look beyond that to the possible extent of shocks to the economy and the capacity
of the economy—including policy responses—to adjust and accommodate to those shocks.
Australia is rated very highly in those regards.
Senator JOYCE—Are we meeting our interest and principal repayments in any way, shape or
form, or are we just extending debt—capitalising our interest and extending our principal?
Mr Hyden—We are certainly meeting all obligations as they fall due. In absolute terms, of
course, the total amount of debt, or net debt, is increasing, and that reflects the budget position.
Senator JOYCE—More simply, for the purpose of the Hansard and those listening, how are
we paying our interest? Are we borrowing more money to pay our interest? Where is the money
coming from to pay our interest?
Mr Hyden—The government accounts are all in one pool, called the consolidated revenue
fund, so there is no distinction as to whether a dollar paid in tax is used to pay interest or
whether it comes from a dollar that has been raised as borrowings. But, as I said, overall, our
total borrowings are increasing.
Senator JOYCE—Is our gross debt going up by more than our interest bill?
Mr Hyden—Yes, it is—because the budget is in deficit.
Senator JOYCE—And you are envisaging the budget to stay in deficit until when?
Mr Hyden—The Australian Office of Financial Management do not make any forecasts about
budget; we take the forecasts published by the government. They show the budget as remaining
in deficit to the forward estimates period.
Senator JOYCE—With the extent of other nations and their debt, which I acknowledge is far
greater than Australia’s—but it is just a matter of their fever being higher than our fever, with
both of us sick—what is the effect on that and your capacity to access funds on the marketplace?
Is there a sense internationally that this debt is part of the puzzle of the financial crisis—with
everybody pretending that it will disappear and go away? Ultimately, this debt internationally
has to be repaid. What views are coming back, or do people just work on the belief that
somehow this debt will just hang around forever and no-one will ever have to repay it?
Mr Hyden—I think it is hard to make generalisations on that question. Over the last couple of
year since the onset of the financial crisis two important things have been happening. One is an
increase in borrowings by a large number of governments, but the second effect, which has
coincided with it, has been changed attitude to risk on the part of many investors which has led
to a flight to quality and safety. So there has been an increased availability of funds for
investment in government debt. While governments have had a very much increased volume of
borrowing, that has been able to be satisfied by an increase flow of funds into the sector. All of
these processes come to an end, and there are some concerns overseas about the levels of
government debt in some countries—which have reached historically very high levels.
Australia’s level of debt by comparison is relatively low compared to GDP, and I think there is a
high degree of confidence in markets and by investors that we will be able to manage that debt
effectively.
Senator JOYCE—Where exactly is all this money that is flowing into Australia coming
from? We know it is coming from overseas, but can you tell from what source the largest portion
of it is coming from and to what proportion, and what the second largest source is? Maybe you
could give me the top three, as best as you can do it.
Monday, 28 September 2009 Senate E 33
ECONOMICS
Mr Hyden—Part of it is coming from overseas. The figures that we have from the ABS have
in the past generally shown that about 60 per cent of the total amount of Australian government
debt outstanding is held by non-residents and the remainder by residents.
Senator JOYCE—Which is the largest holder of the debt?
Mr Hyden—We do not have any breakdown provided by the ABS of its data there. My
impression is that that debt is fairly widely held. In particular, there is a large part in Asia, a large
part in Europe and a significant amount in North America. There is no one market that
dominates, but I would expect that the largest component of the outstanding debt held by nonresidents
is held in Japan. That has traditionally been one of the largest sources of funding for
Australian government debt. China is also of growing importance, as are various countries in
South-East Asia. In Europe there is a very large take-up in the London market, but a lot of that is
on behalf of what I might call global investors or global fund managers, so the funds might
originally be coming from right around the world.
Senator JOYCE—Just so I can clearly understand you—to make the figures easy, it is about
$110 billion—of $110 billion you are saying that about $66 billion comes from overseas and the
rest is financed domestically. Is that your evidence?
Mr Hyden—I was saying that in the past the share held by non-residents has been around 60
per cent. The amount varies from quarter to quarter. In the last couple of quarters, which includes
the period since we increased the size of issuance quite significantly, that share has tended to fall
back and has become lower. We are not entirely clear on why that is happening. One element
there is that the figures include our issuance of Treasury notes, which are short-term instruments
and which I think are more likely to be taken up by domestic investors rather than overseas or
non-resident ones. But even if we take that influence out of the figures, which we can do because
of the way they are published by the ABS, there is still a fall in the proportion of the long-term
debt that is held by non-residents over the last couple of quarters, so I think that is more like 55
per cent in the latest figures that we have, which are those of the June quarter. Whether that will
be sustained I do not know.
CHAIR—I think we are going to have to move on to other senators.
Senator JOYCE—So you are saying 45 per cent is held domestically and 55 per cent by nonresidents.
Let us just go back to the $110 billion. Forty-five per cent of that is going to be $49.5
billion of domestic money that would be going to domestic banks but is now going to prop up
the Australian federal government.
Mr Hyden—We are talking about a stock of debt, so this is money that is already invested.