Australian External Debt

Essay by tillabolaUniversity, Bachelor'sB-, September 2004

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Australian external debt


Foreign debt is referred to also as external debt. Foreign debt is distinguished from other kinds of foreign investment capital inflow such as foreign ownership, because it carries with it the obligation to pay interest or to repay principal.

There is no single factor that caused the dramatic deterioration in Australia's external position (McGillivray&Papadopoulos, 1995). The contributing factors

are both internal and external.

When domestic interest rates are high relative to overseas interest rates,borrowing in overseas financial markets is attractive because of the lower interest rates, while lending to individuals overseas becomes less attractive.

An increase in overseas borrowing leads to an increase in capital inflow while decrease in lending to the overseas sector reduces capital outflow.

Australia remains a major net importer of foreign capital, as it has been for most of its history. Without such capital Australia's economic and employment growth would be lower.

Yet few people seem to understand that the deficit which Australia has on current account (because importing more goods and services than it exports) is the other side of a surplus on capital account. Moreover, unlike the large investment borrowings from overseas of

the 1980s, these capital imports are now apparently being used productively.

According to Reserve Bank (1994) report, Australian current capital surplus of about 5% of GDP can be regarded as not dangerous by comparison with the same surplus in 1984-1985.

As McTaggart et al (1999) says, a country that runs a current account deficit must borrow capital from overseas, to overcome that deficit, and a country that runs a current account surplus lends to the other countries. Over time, if a country continues to run current account deficits, it becomes debtor nation with stock debt owed to others. Therefore, Australia is debtor nation. The level

of Australia's...