Cheap, risky debt abounds, says Treasury

Unconventional monetary policies around the world have had a “pervasive and quite worrying” impact on the pricing of financial risk, says Treasury.

Speaking at the ASIC Annual Forum 2016, secretary to the Treasury John Fraser said the Australian economy is being subjected to some “very powerful global forces” at present.

“There has been an active debate about whether monetary policy has reached the limits of its effectiveness in the major advanced economies, particularly its ability to support growth,” Mr Fraser said.

“We have been in this experimental stage with monetary policy for more than seven years now. A range of different interventions have been tried with, at least to date, mixed results,” he said.

Unconventional monetary policies have had a “pervasive and frankly quite worrying impact on the pricing of financial risk”, Mr Fraser said.

“In this environment, companies that would historically have been viewed as having too much risk around their cash flows to support large amounts of debt on their balance sheets have been able to issue debt in large volume relatively cheaply, often without covenants,” he said.

“And those that would historically have been limited to relatively short-term issuance have been able to raise funds at a very long tenor.

“Part of the monetary policy rationale is to encourage private actors to take on more financial risk, but there is evidence that some of the risk-taking occurring could be considered concerning.

“Markets are increasingly questioning whether global growth will be sufficient to drive corporate earnings and maintain the low default rates necessary to sustain current financial valuations.”

[Related: APRA issues fresh warning to banks]

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