Effect of Conversion on Public Debt

Hokitika Guardian, 16 June 1931, Page 2

Effect of Conversion on Public Debt

INCREASE OF £5,319,489 INTEREST (By the City Editor of Sydney Telegraph). The proposal to convert the internal indebtedness ioi’ the Commonwealth! and States, into a common 4 per cent stock redeemable in lorty years, is meeting with a mixed reception, both in the local and the overseas markets. In order to be successful all suggestion of compulsory conversion must he removed, since the stigma of de-ault and repudiation attaches thereto. Nor can the loan be converted in a spirit of patriotism since it was difficult enough last December to raise £28,000,000 at 6 per cent. o*J per cent, and 5$ per cent,, when appeal was made to the patriotic ferver of the people. The country has drifted helplessly since December, and the Commonwealth Government frankly admits its inability to raise money on the local market at anything approaching a remunerative price, let alone 4 per cent,

Fear of Disaster, The loan will he converted because of the fear that failure to carry out the recommendations of the Copeland Committal* in their entirety will re* suit in possible disaster and total loss of capital and income. Thus it is necessary that Government make an honest endeavour to remove this fear by applying the committee’s recomrnencl.ntiuiis both in spirit and deed. Nmthei the bondholder nor the wage earner will be ultimate losers by the transaction, and only- by full application of the recommendations, which imply general sacrifice, will doubts be removed from the overseas market, upon which we rely for future credits. For the plan, so far as bondholders are concerned, breathes of uneconomic measures, which are rendered necessary only by the persistent policy of drift which the Commonwealth and N.S.W. Governments had •;adopted. There is a misoonseption in the minds of the public,, however, that the conversion proposal will create a hug l increase in the national debt, and that the bondholder will benefit, Thai is not so.

It is proposed to reduce interest by 22} per cent., and where the reduction still entitles a holder to more than 4 .per cent. lie will receive an additional holding of bonds which, on a 4 per cent, basis, will entitle him to the original rate, less 22} per cent For instance, ii a '>< mliinMer is entiled to 6 per coni. ;tl u.■:: >n o 22} per cent, means that ne won!,} b‘ entitled to £4/13/- per cent.

The Public Debt. The following table show's the public debt at March 31, together with interest payable:— Public DebtMarch 31, 1931 Australia, Overseas.' Total C’wenlth—£ £ War—--188,037,008 90,744,380 278,781,388 Works--24,971,015 85,284,349 110,255,364 Total--213,008,023 176,028,729 389,036,75: States — 340,516,876 423,800,401 764,317,27’, 553,524,899 599,829,130 1153,354,09: Interest Payable— March 31, 1931. Australia. Overseas. Total C’wealtii —£ £ £ War--10, 105,603 4,570,782 14,676,385 Works—--1,280,445 4,127,708 5,408,154 Total — 11,386,048 8,698,490 20,084,538 States — 17,457,950 19,869,962 37,412,460 28,843,998 28,568,452 57,412,450 Interest on internal bonds ranges from 3 per cent, to 6 per cent., and it averages £5/4/2.6139 per cent, pei annum.

A reduction of 22$ per cent., therefore, means that the average interest payable on the consolidated loan will be’ £4/0/9.2258 per cent., while the annua] saving of interest will In £5,489,900.

In view of the fact, how'ever, that bondholders are entitled to 9.2258 pence per cent, more than the flat rate which is proposed, it will hi necessary to increase the face value by only £5,319,489, in order to provide the additional interest on a 4 per cent, basis. Thus the internal national debt will be increased by £5,319,489 to £558,844,388, but it should be clearly understood' that no more than existing rates, less 22$ per cent., will be distributed. The increase in the debt is necessary, in order that face value may be brought to a figure which, on a 4 per cent, basis, will pay existing rates, less 22$ per cent.

Bondholders’ Position

In addition, it should be remembered that the bondholder will suffer loss should he wish to «el! In’s security. It should be lvmembered. too. that the increase in the uitt-rnal debt represents only £132.95( l lor annum over the forty years' term o; the issue, or an amount equal only to 5.7 pence -per cent, per annum.

It lias been argued in some irresponsible quarters that' the oversea bondholders should’ also be included in the proposals. The fact that they have been excluded is a trank admission that the scheme, in so far as it violates contracts, is inequitable. And, irom the viewpoint of maintaining our credit overseas, it would be calamitous to include any but Australian bondholders. The sacrifice that is demanded is made only of Australians; its acceptance, provided the proposals are carried out in their entirety, should ultimately strengthen our overseas .credit. Moreover, it is interesting to note that the average interest rate, payable overseas is only £4/15/3 per cent., compared with £5/4/2 per cent, payable locally. In making the estimate of the addition to the public debt, it is assumed that the new issue will be made for the full period of the 40 years’ terms