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An Unsafe Haven

Australia is not being treated as a debtor country. It should be...

AUSTRALIA has run a current account deficit for 30 years, writes Daily Reckoning Australia editor Dan Denning.

This is not news. But surely this structural feature of the economy would figure in whether the Aussie Dollar is actually a safe haven. According to London-based fund manager Andy Seaman, the real measure of a country's safety and creditworthiness is how much it relies on foreign capital to finance its growth.

Seaman says Australia's net foreign assets-to-GDP ratio is negative 81%. This is basically a measure of a country's net foreign liabilities. Foreigners are cleaning up on their ownership of Australian assets, or at least own more Aussie assets than vice versa. Seaman reckons this is a sign of weakness.

Part of the problem is that assets tend to be equities and liabilities tend to be debt. Australia's economy has a high net foreign-debt-to-GDP ratio too. But it's not earning enough on its foreign assets either. What makes it an even bigger problem is what the current account deficit really means.

If you're running a current account deficit, the value of imports exceeds the value of exports. To make up the difference, the deficit, you have to bring in money. This is what it means to 'finance' a current account deficit. If you're spending more than you're bringing in, you have to make up the difference by borrowing.

The borrowing is called a 'capital account' surplus. At first, it looks like a strength. Foreign money is pouring into the country. But that money must continue to pour in to finance the current account deficit as long as you run it. And if it doesn't?

If it doesn't, you normally get a currency adjustment (a fall in the Australian Dollar) and a second look at the creditworthiness of the country and its banking system. That's an elaborate way of saying that instead of being seen as an attractive place for foreign capital and investment, you look a lot more like a country with a big spending problem. You look like a debtor, not a creditor.

The Aussie Dollar is not valued as if the country were a debtor nation, at least not yet. But with the boom in mining investment at or past its peak, what will draw in the foreign Dollars to finance the current account deficit and keep the Australian Dollar high? Tourism? Another housing boom? Christmas? Pies and beer?

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Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

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