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banana republic

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    Current account deficit exceeds 'banana republic' levelsBy Sid Marris
    March 05, 2008 12:00am
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    AUSTRALIA'S debts to the rest of the world have hit a record, exceeding the levels experienced during the chaos of the "banana republic" era, as the feverish economy struggles to find balance.

    In the middle of a global resources boom, the record $19.3 billion current account deficit for the December quarter confirms the infrastructure bottlenecks are plaguing the economy.

    As the nation struggles to get its exports to international markets, the strong Australian dollar is sucking in imports at record levels and fuelling inflation.

    The new Government has already identified ending the nation's infrastructure nightmare as a top priority, with problems at coal and iron ore railways and ports stopping companies and the commonwealth exploiting enormous demand for resources from countries such as China and India.

    Foreign debt blowout

    The December-quarter deficit, which was far bigger than the $17 billion-plus figure economists had forecast, confirmed the economy was being driven by foreign borrowings rather than the nation's savings.

    Calculations by market economists yesterday put the current account deficit at 7 per cent of the nation's gross domestic product - a level not seen since statistics began in 1959 - and possibly as high as 7.2 per cent, depending on today's GDP figures.

    Net foreign debt reached a $610 billion, sitting at record levels, or 56 per cent of the economy.

    When the current account deficit peaked at 6 per cent of GDP in 1986 - a level considered unsustainable - then treasurer Paul Keating warned that the nation risked becoming "a third-rate economy ... a banana republic". At that time, unlike today, the dollar and Australia's terms of trade were falling.

    Until now, economists have been sanguine about the current account outlook, with the dollar high and terms of trade strong, thanks to demand for resources, and wholesale reduction of public debt.

    BT Funds Management chief economist Chris Caton agreed there had been reason to be relaxed about the rising size of Australia's current account deficit.

    "But this is starting to get serious," he said yesterday. "It is clear that Australians need to finance more of the nation's capital spending by saving rather than relying on the kindness of foreign strangers, particularly given the more stringent conditions attached to that kindness these days."
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