DEBT ANALYSIS

Evening Post, Volume CX, Issue 117, 14 November 1930, Page 10

DEBT ANALYSIS

AT HOME AND ABROAD

TWO AUSTRALIAN HURDLES

WILL LENDEES LEND ?

(Written for "The Post.") Australian Governments have ■to meet a. maturing internal loan of 2S millions next month, and in London they have 38 millions of short term indebtedness hanging over their heads. They hope that this latter may be funded by London lenders. No maturities of London long term loans annoy them for the moment. The banks' pool is enabling the Governments to meet interest payments (34. millions annually) on existing external loiig term loans. Underlying the cabled reports of the struggle on the Australian Loan Council is the question of how much Governmental borrowing the Australian (internal) loan market can stand. On the internal borrowing side, the first obstacle is the conversion of loan moneys, due in December, of 2S millions. This 28 millions (of which about IS millions is owed by the Commonwealth Government, the balance by the State Governments) is due to Australian landers, and should be paid on 15th December or before. The payment can be made only with the help of Australian lenders. Will they support the Government sufficiently to make this 28 millions conversion loan a success? Or will the talk of the Labour caucus about "deferring the redemption of the loan" cause Australian lenders to close their Australian pockets and make this Australian loan a failure? DEGREES OF "REPUDIATION." As a means of coercing lenders, it has been suggested that existing bondholders should be compelled by legislation to hold their bonds for another year (instead of demanding payment on 15th December), or/and that some of the biggest lending machines (the banks, which after all are composed of comparatively small shareholders) should be singled out and ordered to use their' business funds for the convenience of political Governments, to satisfy demands for conversion money or new loan money. And, . say the extremists, if the banks have not the funds they can print more notes. The task of the Commonwealth Government and the State Governments (making collectively the Australian Loan Council) is to resist all this extremist talk, and to coax a conversion loan of 28' millions out of an internal market that must surely have been "rattled" in no small degree by the caucus nmtterings. So much for the 28 millions maturing loan. Over and above that, the Australian Governments have short term indebtedness, within Australia, of £7,134,000. Of this, £2,779,000 consists of bank overdrafts (mainly incurred by the Commonwealth Government, but to help State Governments) and the balance consists of Treasury bills entirely owing by State Governments. Going outside Australia, it is found that Australian Governments' short term indebtedness in London amounts to nearly 38 millions (overdrafts and Treasury bills) and that their annual interest bill on their long-term loans is 3-1 millions. SHORT-TERM LOANS TO PAY INTEREST. For five years up to 30th June, JD2S, the Australian Governments increased their long-term debts to London lenders at the rate of 30 millions a year. But since January, 1929, Australian Governments have not been able to raise an oversea loan. Prior to that, these oversea loan moneys "were, in effect, exchanged for revenue moneys in Australia without recourse to the banks, and were applied to meet the annual overseas obligations of the- Governments." But when the London lenders stopped lending a new expedient had to be found, and "our London, payments for a considerable time have been met partly by remittances from Australia and partly by short-term borrowing by means of overdrafts and Treasury bills." Hence has arisen this huge short-term indebtedness in London. The two quoted statements above have the authority of the Federal Treasurer himself, Mr. Lyons. He adds-tho further information that "the overdrafts provided in London by tlie Commonwealth Bank have been made possible mainly by largo shipments of gold from Australia." '(To which there is a.limit.) AVhen it became evident that tlic expedient of short-term borrowing in London, to meet London interest on long-term loans, had reached its limits, some other means had to be devised to meet tho Governments' above-men-tioned annual bill in London for interest and sinking fund of 3-i millions. The banks were appealed to, and by what is called the exchange pool they now pool their London funds and provide approximately three millions a month in exchange for revenue moneys in Australia. . REACTION ON REVENUES AND INTERNAL MARKET. But tho pooling device in turn helped (by restricting private finance) to check Australia's imports, and with the slump of imports the revenues ofAustralian Governments have slumped, so that the Customs-receiving Government (Federal) has to admit in November that its ' heavy taxation of _ a few months earlier cannot balance its Budget. Result —still heavier taxation, with even now no hope of a balanced Federal Budget this year, but perhaps, next year. (Observe the cumulative effects of all this on the internal loan market that is to be tapped in December—next month!) It is true that this slump in imports promises to restore at last .an excess in export values over import values, but that is being done at the cost of wrecking Government revenues, also private business. The sources of taxation, and the sources from which internal loan money comes, are alike threatened. In other words, both Budget and bondholder arc on thin ice. If that ice- breaks, could all the money in tho banks repair the damage1? The Federal Budget deficit for the year 1930-31 can only be guessed a!:, but for the three preceding years there is an accumulated deficit of nearly (U millions. • ■ EXCESS OF EXPORTS, YET POVERTY. Consideration of the foregoing points will help to make clear the meaning of the Federal Treasurer when he told the Commonwealth Parliament on sth November, in connection with oversea indebtedness: "From time to time the banks raised the exchange rate for London money, and rationed their customers with the object of conserving London funds, restricting imports, and assisting exports. Steps were also taken by the Commonwealth Government to restrict imports by rationing and by tariff measures during the last session of Parliament. Subsequently a scheme for tho mobilisation of London exchange was adopted under which the banks agreed to pool their London funds, and to provide approximately £3,000,000 a month in exchange for Australian money. The London funds so provided were to bo used to meet the national liabilities in

respect of interest and limited services of the Commonwealth and Stato Governments. This scheme took effect from Ist September. "These measures, combined with the diminishing internal trade in Australia, have reduced imports, so that even with tho existing low prices for wool and wheat, the value of our exports for the year will considerably exceed that of our imports. The diminished imports are, however, reflected in lower revenue from Customs duties. Our position would be greatly improved if wo could at an early date fund some of tho short-term indebtedness abroad. This floating debt is a disturbing factor, if not a real menace, and it is essential that it should be funded as early as possible." That is to say, if the Commonwealth C4overnment felt it could rely on London lenders to put the London shortterm indebtedness (the above-men-tioned amount of nearly 38 millions) ou a long-term basis,. and if it could rely on Australian lenders for the conversion of tho Australian maturing 2S millions in December, the two principal hurdles would be cleared. But what reassurance can lenders cither in Australia or in Britain derive from talk about postponing repayments, compelling banks to finance new loan issues, and note inflation?