Over the past decade, financial markets in Australia have been deregulated almost completely while external debt has increased substantially. This report examines both these features of the Australian economy in an attempt to discover any causal relationship.
Australia entered the 1980's with an extensive array of direct controls on the banking and finance sector. By the close of the decade, almost all foreign exchange controls and restrictive bank borrowing and lending controls had been dismantled.
Coincident with this process was a rapid increase in Australia's external debt. Debt (whether gross or net) had risen rapidly in absolute terms, as a proportion of GDP, on a per capita basis and as a share of export earnings.
The increased competition and wider freedom resulting from deregulation has encouraged the banks to become more aggressive in their borrowing and lending policies. This behaviour appears to have aided the increase of Australia's foreign liabilities during the 1980~s. The particular areas that are identified include:
* The new foreign banks have obtained a proportion of the funding in the form inflows from their overseas parents. substantial of capital
* Vastly increased use of foreign money markets by the banks as a means of financing Australian dollar assets with foreign currency borrowings.
* Substantial increases in private sector indebtedness (corporate and household) taking advantage of the expansion in available funds.