Kim Beazley called it the ‘fully imported lorry of lies’. The then-deputy prime minister was referring to a Mazda made in Japan that opposition leader John Howard named the ‘debt truck’. Ahead of the 1996 election, the mobile billboard was designed to stir alarm about Australia’s swelling foreign debt.

When the truck appeared in the spring of 1995, Australia’s net foreign debt – what Australians owe foreigners minus the inverse – stood at $186 billion. Gross debt was $269 billion. Interest payments on the gross debt amounted to about 11 per cent of exports and about 4 per cent of gross domestic product. Over the preceding five years (when the loans were struck), US 10-year Treasury yields had fluctuated between 5.2 per cent and 9.1 per cent.

The truck is gone and worries about Australia’s foreign debt liability have faded too. Yet net foreign debt has ballooned to $1.2 trillion as of September 30. This amounts to about 50 per cent of GDP. Gross debt is now $2.8 trillion, about 110 per cent of output. These are high ratios by international standards.

One way to view net foreign debt is that it’s the culmination of uninterrupted deficits on the current account from 1973 to 2019. The current account is the widest measure of a country’s interaction with the rest of the world in goods, services, and income flows. A deficit in the current account can be viewed as a savings shortfall that foreigners fund through the capital account, the other side of the balance of payments.

Deficits on the current account are sound if they bankroll investments that will earn foreign exchange to repay debt bills. Until these borrowed foreign savings are repaid, they sit among a country’s liabilities.

Even as Australia’s foreign debt climbed, many dismissed concerns about this burden. The debt apologists claimed individuals owe almost nothing of this debt. Most of the debt is held by the private sector ($2.3 trillion or 83 per cent). Most of that is owed by banks ($1.7 trillion or 61 per cent).

But it’s a mirage to view Australians as shielded from foreign debt, as Beazley’s comment about lies implied. Australian households owe banks a record amount of mortgage and personal debt. Where did banks get the money? Much of it from selling bonds to foreigners. Households are thus exposed to foreign debt in three ways. One is that export earnings are diverted to meet repayments. The second is as taxpayers, they backstop the banks that owe foreigners this debt. The third is the debt puts upward pressure on mortgage rates.

The not-to-worry crowd has a better point that the debt burden has eased thanks to the surpluses on the current account since mid-2019. Sixteen of the past 18 quarterly balances have been surpluses thanks to higher commodity, food, and energy prices. Net foreign debt has accordingly dropped from a record high of 63 per cent of GDP in 2016. The problem, however, is the sluggish global economy, especially struggling China, suggests a bleak outlook for the current account ahead.

Another reason the unfazed say not to fret is that Australia is a net owner of $351 billion of foreign shares. Australia’s ‘international investment position’ is derived from adding the net debt and equity positions and was a liability of $815 billion on September 30. But no one can force super funds, who own most of the foreign shares, to sell equities to help banks repay loans.

The main reason people have ignored mounting foreign debt is because interest rates were at historic lows. For much of the past five years, US 10-year Treasury yields hovered between 0.6 per cent and 3 per cent. This meant the percentage of exports needed to pay the interest bill on the foreign debt remained contained. Debt repayments on foreign debt only amounted to 5.5 per cent of exports in the June quarter and only about 1.7 per cent of GDP.

That luck and relatively low government debt by international standards mean Australia is one of the few countries with the highest possible credit ratings.

Unfortunately for Australia, record-low interest rates are no more. US Treasury 10-year yields ended 2023 at 4.4 per cent. Memories of troubling inflation, Washington’s budget deficits, and US foes shunning US Treasuries for political reasons signal that the benchmark yields for global credit markets are likely to stay above recent lows.

The risk is that one day, global investors might baulk at adding to Australia’s foreign debt. Australia would face an economic crisis if foreigners stopped sending their savings because, by the count of the ABS, about $542 billion, or 19 per cent of gross debt has a maturity of less than 90 days. While this figure is bloated by derivatives, it highlights the vast amount of debt that needs to be renegotiated at acceptable rates every three months for Australia’s economy to function.

Foreigners could demand a steeper return on Australian debt to justify their risk but that would boost mortgage rates to punishing levels. A lending freeze would be lethal for the economy and the financial system. A plunging Australian dollar would indicate that foreigners are losing faith in Australian credit or that cross-border lending is collapsing for other reasons (as occurred during the Global Financial Crisis).

Net foreign debt was only about 30 per cent of GDP in 1986 when a currency crisis prompted Paul Keating to warn Australia risked becoming a ‘banana republic’. No one can rule out a replay when the ratio of net debt to GDP is 20 percentage points higher. Investors are fickle. No country can endlessly borrow from foreigners. The truth is that foreign debt is Australia’s biggest economic weakness.

There is no level or ratio where foreign debt automatically sparks mayhem, it must be acknowledged. Foreign debt ratios could climb higher without a ruffle if interest rates were at benign levels. There are no signs that a crisis is brewing over the issue.

But there was no forewarning of the crisis over the current account and foreign debt in the mid-1980s. It’s no lie to warn a similar reckoning could occur at any time.