Tuesday, January 18, 2011

S&P's missing $400 billion



Regular readers will recall that this year's coverage began with the unwholesome news that S&P were in the process of downgrading Australia's BICRA score - the credit rating given to the Australian financial system.

This blogger has chopped a rather important chart from the primary BICRA document (see above, full document below) in order to ask a question.

Credit junkies will note that Australia's debt to GDP ratio is graphed in the upper 120 percentage point range. To be precise, it is 127.3%.

The question is this. Why is Australia's debt to GDP so low?

Dr Steven Keen puts the ratio at 160%, which would clearly push Australia into the nasty territory currently occupied by Spain, the UK and the US.

This blogger has double checked Dr Keens' figures and they are correct. It then played around with the credit aggregates available at the RBA (D02), adding and subtracting them in various ways, leaving some credit components out and calculating against GDP. But nothing has worked to produce 127.3%.

Wondering if this was a straight error, the same was tried with New Zealand's debt to GDP figures. Again, no rearrangement of figures served to justify the quoted ratio.

So clearly S&P uses some kind of proprietary formula for calculating debt to GDP that loses more than 20% or roughly $400 billion of Australia's debt.

The above graph hints at that formula in the description "Domestic credit to the private sector". But what exactly does that mean?

Perhaps it means that international banks that extend credit in Australia are excluded. Or, perhaps it means that offshore borrowings are excluded. Or, perhaps it means that some portion of Australian credit ends up offshore.

This blogger is buggered if he knows. So it rang S&P. They haven't answered his inquiry.

Given the rather important nature of this question, perhaps someone out there can help locate the missing $400 billion.

S&P Preliminary BICRA in 23 Countries Jan 6 2011 (1)

S&P FI RfC Methodology for Determining BICRA May 13 2010 (1)

11 comments:

Anonymous said...


"Official figures show that our banks now owe overseas investors a record $352.7 billion, equivalent to 27 per cent of the country's entire economic output."

Crocodile Chuck said...

Interesting...$400B is 'just about' the borrowings of the 'Big Four' from the inter-bank market...

David Llewellyn-Smith said...

I can't believe that they would exclude the prime weakness of the system in their assessment. Surely not...

Luke Garratt said...

Obviously, you need to take into account the Kangaroo and Koalas differential when calculating GDP.

Untapped tourism and logging productivity

PETER_W said...

The 400B may be the Aussie banks foreign lending into NZ i.e. Gross vs Net

David Llewellyn-Smith said...

Good suggestion but I don't think the RBA aggregates would include NZ created credit. Would they?

PETER_W said...

Yes, because the article the graph you reference is 'the domestic sector'. That is true of the USA numbers as well at a glance.

USA & UK banks lend to Australia and Australian banks lend to NZ so this is a Gross/Net issue.

PETER_W said...

The 'domestic private' in Australia will be housing credit $1157B + domestic business credit ~ $500B = $1657B the $400B will be Aussie banks lending into NZ + USA + UK = $400B the gross will be roughly $2057B the net will be roughly $1657B

The AUD/USD exchange rate can skew how this looks short term...

A strong AUD reduces the AUD price of external liabilities and they are hedged over the short term as the external loan book rolls they get renewed.

If the AUD halved and stayed that way for the duration of the external loan book rollover ~ 3.5 - 6 years then the external debt would double in AUD (as an example).

Bank Lending Criteria said...

But in a sign of increasing nervousness, investors put nearly eight times as much money into bank accounts as they put into bond funds last year.

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