IMF warning to Australia over rapidly growing debt

The Australian 12:00am October 16, 2017

David Uren

Debts have risen faster over the past decade in Australia than in most other G20 nations, leading the IMF to warn that the ­nation is testing the financial market’s tolerance for risk.

The International Monetary Fund is particularly worried about Australian household debts, which are 23 per cent larger than annual gross domestic product, a level by far the highest among G20 nations, with Canada the only other nation with household debts larger than the economy.

“Household leverage and high house prices in Australia and Canada make these economies more susceptible to risk premium shocks,” the fund’s analysis of financial stability says.

“There is a particularly strong need for financial-sector policy vigilance to guard against further build-up of imbalances.”

The combined debts of government, business and households in Australia are now 147 per cent larger than GDP, up from 87 per cent 10 years ago.

Among G20 nations, there have been bigger debt increases in China, Canada and France, but the growth in debt in Australia outstrips that of the US, Japan, the UK and Italy, nations much more severely affected by the financial crisis than Australia.

“While debt accumulation is not necessarily a problem, one lesson from the global financial crisis is that excessive debt creates debt-servicing problems that can lead to financial strains,” the fund says.

Across the G20, debts have risen by $US60 trillion ($75 trillion) to $US135 trillion since the GFC, with China and the US accounting for about $US20 trillion of the increase.

Australia’s government debts are still among the smallest in G20 advanced nations at 44 per cent of GDP, but 10 years ago they were the lowest of all G20 nations at just 10 per cent. The rise in government debt in the past decade has been greater in Australia than in Italy, Canada, China or Brazil.

Australian private-sector debt, including households and business, is, with Canada, among the largest in G20 advanced nations and is surpassed only by China.

Despite the fall in interest rates, the burden of servicing debts for households and business in Australia is heavier now than it was in 2006, when the Reserve Bank’s cash rate was almost five percentage points higher. The IMF says this raises the question of how they would handle a rise in rates.

“Weaker households and companies in these countries could have trouble repaying their debt if interest rates rise or if incomes fall. Experience has shown that a build-up in leverage associated with a run-up in house price valuations can develop to a point that they create strains in the non-­financial sector that, in the event of a sharp fall in asset prices, can spill over to the economy,” it says.

The fund says not all credit booms lead to recessions and the rapid growth in debt in Australia over the past six years is not yet at a level typically associated with downturns, unlike the credit booms in Canada and China. But it says Australia, like those two countries, has the additional risk of rapid growth in house prices.

The fund’s biggest global concern is that with interest rates still at record lows, investors are accepting very low returns for taking much larger risks than in the past.

It has modelled the impact on the global economy if investors became concerned that debts had risen too far and started demanding higher returns for risk.

The result would be a global fall in share and house prices of about 20 per cent, with Australia and Canada among the most dangerously exposed.