The Decision By Joe Hockey To Raise The Debt Ceiling Is An Invite To Foreign Bond Buyers

Joe HockeyGetty / Graham Denholm

Australian federal Treasurer Joe Hockey’s announcement that the Government’s debt ceiling will to be raised from $300 billion to $500 billion was much larger than most financial market participants thought likely from a guy who spent so much time in opposition attacking the borrowing of the previous Government.

It’s the kind of thing that in some countries might cause a big rise in bond rates and fall in the value of the currency. But financial markets are unlikely to care too much according to Westpac in a note issued this evening. Excerpt:

The large increase is designed to provide financial markets with ‘stability’ in wake of the recent political wrangling over the US debt ceiling. The fact that the debt ceiling needed to be raised should come as no surprise to markets given figures in the 2013-14 Budget suggested that the ceiling would be breached sometime in the 2014-15 fiscal year.

That’s in the immediate term but in the long run Westpac says “it does imply that future issuance will be larger than previously thought”.

Interestingly at a time where the RBA and Treasury, and of course our Treasurer are hoping that the Aussie dollar falls to deliver a growth dividend to the budget the increased funding task that the new $500 billion debt limit implies means that the foreigners will need to stay in love with the Aussie dollar.

Otherwise who is going to buy the bonds?

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