Fixed Income

Escalating leverage in Australia


Peter Fullerton

Peter Fullerton

Credit Analyst

Our recent report on the size of debt capital markets (The Fix: Sizing Australia’s debt market: perceptions and the facts - May 2014) outlined how Australian debt markets had grown significantly across the board highlighting how this has supported a debt market with more depth and breadth for investors. Based on these findings, it’s rational to then ask if leverage is inherently higher in the Australian economy as a result of this growth in debt markets, implying a higher level of embedded risk. At first glance, this assessment would appear to be at odds to broader market sentiment. As an economy, Australia avoided the worst of the Global Financial Crisis (GFC) and we are now left as one of the few sovereigns rated Aaa, a banking sector dominated by four Aa rated banks, a healthy business sector and households experiencing improving net wealth through increasing residential property values and superannuation accounts. Leverage and associated embedded risk would appear to be benign for investors, but is that really the case? Our analysis drills down into leverage at these four key segments of the economy and identifies some uncomfortable issues.

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