Foreigners own 65% of the $409bn of cwlth government bonds on issue (up from just $57bn in 2006). Offshore investors are also crucial suppliers of wholesale funding to the major banks, which in a perverse piece of circularity are forced to hold $195bn of government bonds for their "liquids" books. While in theory banks are meant to be able to sell these bonds during a crisis to get cash to repay depositors and bond holders, as one senior RBA official told me: "If all the banks start selling their government bonds, we will discover they are neither risk-free nor liquid." It is thus easy to imagine that when Australia experiences its first recession in 25-plus years we could see foreigners selling government and bank bonds at the same time as the budget deficit is blowing-out while banks are likewise looking to divest government bonds to bolster liquidity. This would send the cost of servicing public and bank debt soaring and begs the question why we cannot generate more debt funding from the immensely equity-biased $2trn superannuation savings pool. Free (VIEW LINK)