timmii
sporadic attendee
- Joined
- Nov 9, 2002
- Messages
- 928
Ok i've been asked a couple of times why Australia's foreign debt is not recorded in the CA, and is recorded in the KAFA, so i'm going to try and explain it here.
The balance of payments conforms to double-entry bookkeeping so every transaction has two effects - inflows and outflows as it were.
Foreign debt is when Australia borrows money (cash inflow) in exchange for future interest repayments (cash outflow). So the initial recording of this is an increase on the capital and financial account for the cash inflow. When the debt servicing payments are made however, this is a cash outflow and increase the net income account deficit on the current account.
This "debt trap" is one of the issues with "external balance". The more we borrow, the more we have to pay back - which worsens our CAD, but since the CAD must balance the KAFA, this in turn means more assets must be sold, more debt must be acquired, or the currency must depreciate (and the trade balance deficit reduced).
The balance of payments conforms to double-entry bookkeeping so every transaction has two effects - inflows and outflows as it were.
Foreign debt is when Australia borrows money (cash inflow) in exchange for future interest repayments (cash outflow). So the initial recording of this is an increase on the capital and financial account for the cash inflow. When the debt servicing payments are made however, this is a cash outflow and increase the net income account deficit on the current account.
This "debt trap" is one of the issues with "external balance". The more we borrow, the more we have to pay back - which worsens our CAD, but since the CAD must balance the KAFA, this in turn means more assets must be sold, more debt must be acquired, or the currency must depreciate (and the trade balance deficit reduced).