Gird the loins for a cacophony of historic and hysteric proportions, for we are hurtling headlong towards the dreaded federal budget.
If you thought this week's release of the biannual International Monetary Fund report on the world economy was a nasty affair, full of spin and recrimination from Parliament and punditry, get set for next month.
It is one year out from an election after all, and this budget is the one where Wayne Swan has to stick to his surplus promise. If there is a book in it, it should be titled Against all Odds. It might be skinny, it might be symbolic, but, teeth-clenched, the Treasurer looks like he might just get there - with some hocus pocus on the national book-keeping front.
Should he do so, motivated by the sheer delight of tormenting Tony Abbott and Joe Hockey, it will be a feat of political rather than economic moment. A sideshow if you like.
By the standards of its peers, and as noted by the IMF, Australia is in tip-top shape (more by good fortune than good management) and the significance of our public debt, most of it owed to Australians anyway, is trifling.
There is another debt far more profound, however, than public debt, or the national debt as it is also called. It is rarely ever mentioned but is potentially far more devastating. It is Australia's foreign debt.
It is the amount of money the economy owes, not the government the culmination of Australia's relentless current account deficits and of bank borrowing overseas to fund the national mortgage obsession.
You won't hear the ALP or the Coalition rabbiting on about this
ol' debt. This is our Crocodile Dundee debt, as esteemed colleague Ross Gittins once dubbed it. National debt? "That's not a debt ... this is a debt!"
The Reserve Bank rarely mentions it, the Bureau of Statistics hardly showcases it, economists act as if it doesn't exist. And yet it grows.
Our foreign debt, as at the December quarter, stood at $1.27 trillion. Fair enough, that is Australia's gross debt, and debt should be seen against a borrower's capacity to repay.
Our net foreign debt is $735 billion. It grew by $396 billion under 11 years of John Howard. Under Rudd and Gillard it has kept rising, up another $147 billion in five years.
And now that the secret is out, that the banks are too big to fail, that is, we all own it.
It is not the fault of the banks. There is nothing wrong with borrowing offshore to fund a domestic business. But it is a huge policy issue as borrowing without consequence can't last forever, as the plight of Europe and the US shows.
The banks mostly borrow in three and five-year paper so our massive foreign liabilities will get very nasty when or if the dollar drops back to US60? alongside, say, a pullback in China. A lower currency means higher borrowing costs when it comes to rolling the debt. Ergo, credit squeeze.
Yes, one day the banks' "higher funding costs" spiel will be real. One day.
In case you missed it, the rather large accounting firm BDO blew up a few weeks ago and its rival, Grant Thornton, signed off on a rescue package for its Melbourne and Sydney operations this week.
How, you reasonably ask, does a large accounting firm blow itself up? Quis custodiet custodes?
Good question. Were they doing such a fastidious job auditing other people's accounts that they forgot to tend to their own?
Under the loose federation of practices that make up the BDO franchise in Australia, the state-based partnerships ran their own show.
Melbourne and Sydney, though, ran a poor show. They let their debts escalate to $100 million relative to revenues of $88 million.
A common weakness of a partnership model is that when some partners decide to leave, the other partners have to buy them out. Hence they borrow.
It is perhaps ironic that BDO touts "aged care" as one of its core strengths for too much debt was raised to pay out too many retiring partners in Sydney and Melbourne.
All's well that ends well. The sale price is rumoured at $50 million, but it's a rubbery number without knowing the full picture on debt and so forth.
The deal, which has caused some headaches among dissenting partners at Grant Thornton, will sign up another 55 partners and catapult the firm into the number six slot in Australia, just behind WHK - with the Big Four bean-counting majors well out in front.
It's been a long and arduous journey for investors in listed property stocks. And for some, that journey reached a welcome denouement this week when Canadian giant Brookfield lobbed a $410 million takeover for Thakral Holdings.
It was pitched at a regulation 30 per cent premium to where the stock had last traded on the day before the bid. On the day of the bid, however, there was some ... let's say, ahem, impeccably timed buying.
Here were Thakral shares trundling along in their typically illiquid fashion, only trading once at 53.5? all day. Then, suddenly, a buyer or three with great foresight and acumen swooped, paying up to 58? a share in a series of nine trades between 3.18pm and 3.31pm.
Then, with unnerving coincidence, just three minutes after this last purchase, at 3.34pm, the ASX put Thakral into a trading halt and lo and behold there's Brookfield with its takeover bid at 70? a share!
Frequently Asked Questions about this Article…
What should everyday investors watch for in the upcoming federal budget and Wayne Swan's surplus promise?
The article flags the budget as highly political — it’s one year out from an election and Treasurer Wayne Swan is under pressure to deliver a surplus. Expect the surplus to be slim or symbolic and possibly achieved with accounting measures. Everyday investors should watch for any fiscal signals that could affect markets (tax or spending changes) but remember the move may be more political than economic.
What is Australia's foreign debt and why does it matter to investors?
According to the article, Australia’s gross foreign debt stood at about $1.27 trillion at the December quarter, and net foreign debt was around $735 billion. This is the debt the economy owes overseas — driven by current account deficits and bank borrowing abroad — and it matters because large foreign liabilities can increase financial vulnerability, currency risk and future borrowing costs.
How has Australia’s net foreign debt changed under recent governments?
The article notes net foreign debt grew by roughly $396 billion during 11 years of the Howard government, then increased by about $147 billion in the five years under Rudd and Gillard. Those figures show the foreign debt trend has continued to rise across multiple administrations.
How can banks’ offshore borrowing affect bank funding costs and everyday investors?
Banks mainly borrow offshore using three‑ and five‑year paper. The article explains that if the Australian dollar falls (for example toward about US$0.60) or if overseas demand weakens, rolling that foreign debt becomes more expensive. Higher funding costs for banks can filter through to tighter credit conditions, higher interest costs and potential impacts on bank profits — things investors in banks and broader markets should monitor.
What happened with accounting firm BDO and why should investors care?
The article reports parts of the large accounting firm BDO effectively 'blew up' and Grant Thornton agreed to a rescue package for its Melbourne and Sydney operations. Those state partnerships had debts that escalated to about $100 million against revenues of $88 million. For investors, this highlights risks in partnership-style professional services firms (e.g., buyouts of retiring partners triggering debt) and reminds investors to watch balance-sheet health even in non-financial service companies.
What does Grant Thornton’s rescue of BDO’s operations mean for the accounting sector and investors?
Grant Thornton’s deal reportedly signs up another 55 partners and would push the firm into around the sixth largest accounting firm spot in Australia, just behind WHK and well behind the Big Four. The sale price was rumoured at about $50 million, though the article notes that number is uncertain without full details on debt. For investors, consolidation can reshape competitive dynamics in the sector and create both integration risks and scale-related opportunities.
What happened with Brookfield’s $410 million takeover bid for Thakral Holdings that investors should note?
Brookfield lodged a roughly $410 million takeover for Thakral, pitched at about a 30% premium to the previous day’s trade. The article describes suspiciously timed pre-bid buying in an illiquid stock: Thakral had traded only once at 53.5c that day, then a series of nine trades between 3:18pm and 3:31pm paid up to 58c, followed by an ASX trading halt at 3:34pm and Brookfield’s 70c per share bid. Investors should be alert to trading patterns around takeover announcements.
How can illiquid trading and takeover timing affect small investors, and what should they watch for?
The Thakral example in the article shows how thinly traded (illiquid) stocks can see sudden price jumps from a few well‑timed trades just before a takeover announcement. Small investors should watch trading volume, recent trade prices, and sudden bursts of buying ahead of announcements. Trading halts and takeover premiums can change valuations quickly, so vigilance around timing and liquidity is important.
Call 1300 880 160
Start a chat
Schedule a call
