We're solvent in global and historic terms


CONTRARY to the views of Barnaby Joyce, Australia is less likely to encounter problems paying back its government debt than any other advanced country, based on its expected deficit and borrowing.

International financial markets consider the governments of Japan and Britain are in much greater danger of default than Australia.

Although Australia's debt has been rising rapidly at a rate of about $1 billion a week, the peak debt level is expected to be low relative to other countries and Australia's own history.

US government debt is rising at a rate of closer to $40bn a week.

The Rudd government forecasts net debt (yes, net, not gross - Steve) will peak at 9.9 per cent of GDP in 2013-14, which is half the level reached at the end of the Keating government and below the levels of the mid-1980s.

Grattan Institute director Saul Eslake has compiled figures for the total number of commonwealth government bonds on issue showing that in the wake of World War II, the gross debt peaked at 105 per cent of GDP in 1950. He says that by international comparison, "Australia is the least likely of 25 advanced countries to run into any problems servicing its debt".

Rising concern about sovereign debt has sparked large share price falls worldwide in recent weeks, and is again threatening the stability of world financial markets, with attention focused on the ability of Greece to keep servicing its public debt.
The founder of the US investment group Pimco, Bill Gross, says the combination of large budget deficits and high levels of government debt can send economies into a downward spiral, where it is hard to achieve the growth needed to keep up the debt service.

He says the danger level is reached when public debt exceeds 90 per cent of GDP, which he says would slow the maximum rate of economic growth by one percentage point or more. Australia is the most solvent advanced country, with lower gross debt and one of the smallest budget deficits.

Mr Eslake notes that the strength of Australia's position owes much to the previous government's preoccupation with running a balanced budget, which meant that it had much lower debt levels at the beginning of the crisis than any other advanced nation.

International financial markets provide insurance against countries defaulting on their government bonds.

Westpac interest rate strategist Damien McColough says it costs 68 basis points to insure a five-year Australian government bond against default, which is slightly less than for US treasury bonds.

By comparison, investors in Japan's bonds must pay 86 basis points, Britain 93 basis points and Spain 145 basis points. Investors in Greek government bonds must pay an additional 3.65 per cent to get insurance against default.

"The global investor is not particularly worried about Australia defaulting; and those relativities show us in a very good light," Mr McColough said.