The financial pages made for gloomy reading today and there’s one disturbing theme across the litany of bad news: excessive debt.

Australia suffered its biggest ever current account deficit of $19.5 billion in the March quarter and net foreign debt blew out to a record $615 billion.

Maybe it’s time the Liberals got out the debt truck again because this is what John Howard said in February 1996:

We now owe the rest of the world $180 billion. Nothing, my friends, symbolises absolutely and comprehensively more than that disgraceful figure the total failure of Labor’s economic management over the last 13 years.

Foreign debt accumulates with current account deficits which can only be financed by borrowings or more sales of the Australian farm, which is already majority foreign owned when you remove housing.

The last four quarterly current account deficits have been as follows:

  • June 2007: $16 billion
  • September 2007: $15.6 billion
  • December 2007: $19.3 billion
  • March 2008: $19.5 billion.

That makes a grand total of $70.4 billion. As a percentage of GDP, the current account deficit of almost 7% is worse than the figures which triggered Paul Keating’s 1986 Banana Republic comment to John Laws and before we entered this golden resources boom which has delivered the best terms of trade in 55 years.

We know that households have $1 trillion in debt, but how much are governments contributing? The Feds owe $50 billion but the real problem is with the states which already owe more $100 billion are collectively adding more than $20 billion a year to borrowings.

Whilst the newspapers somehow use the word “surplus” to describe the NSW budget forecast, the truth of the situation can be found on the website of T-Corp, the central debt manager for NSW, which at 2pm yesterday revealed that the state’s new borrowing program will hit a record $6.8 billion in 2008-09.

It is now only a matter of time before the Labor states start to lose their AAA credit ratings unless the Rudd Government steps in with a bailout.

And the states can’t keep turning to the financial engineers for basic infrastructure such as Victoria’s new $850 million Royal Children’s Hospital because Babcock & Brown, the sponsor of that project, is sinking under a pile of debt as well.

After plunging 8% to a three year low of $11.11 yesterday, Babcock recovered in morning trade on the back of rumours that Macquarie Group was planning a bid to take out its rival.

This makes a lot of sense, but it will all come down to the Babcock executive team which still owns 40% of the company. As HBOS, RBS, Citi, UBS, Merrill Lynch and all the other credit crunch victims have discovered, raising money from your own shareholders under distress requires a huge discount. If that’s the only alternative for the Babcock staff, maybe the warm embrace of Macquarie will look very attractive.

*Go here for two new Babcock videos taken from the AGM video webcast.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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