A debt consolidation arrangement was signed between the Australian Government and the US Federal Reserve in November 2017.
Under the agreement, which is due to be completed in late 2019, the Australian government will be forced to repay $8.5 billion in government debt to the US, which will be repaid over 10 years.
The agreement is set to be the largest in US history, as it is a deal which will require the Government to sell assets, such as its assets in the gold and diamond markets, in order to make up for its debt.
But it also has the potential to be controversial, with the Government’s own debt restructuring plan, due in 2019, already being criticised as overly generous.
What is debt consolidation?
When the US National Treasury Employees Union (NTU) first announced its plans to join the debt consolidation agreement in 2019 there was some uncertainty about how it would be structured.
While it is widely understood that the US will repay $9.5bn of debt to Australia over the next five years, there was no consensus on how it was going to be structured, with many analysts and politicians questioning the timing of the deal and calling for an overhaul of the US debt system.
This led to a split between the US and Australia, with a number of political parties saying that the NTU should not be involved in the debt deal at all.
However, a number in the US Senate, including Senator Marco Rubio, who was appointed by President Donald Trump, are pushing for the agreement to be renegotiated.
What does the debt consolidate deal entail?
As part of the agreement Australia will be required to make an “extended maturing” repayment to the Federal Government, meaning it will repay the full amount of the debt within three years.
In return, the Government will receive a $10 billion concessional loan and the repayment terms will be adjusted according to a “risk adjustment” mechanism, which involves the Government making adjustments to the value of the Government debt in order for the Australian debt to remain in good standing.
The Government will also be required by the agreement not to engage in any “bailouts”, and to take into account the Government Debt Reference Committee’s recommendations on what debt to use for public expenditure.
What happens next?
In November 2019, US President Donald Trumps Treasury Secretary Steven Mnuchin said that the agreement would be completed “within three months”.
However, that was not the case.
On October 17, 2019, two days before the completion of the final repayment, the Treasury announced that the debt would be refinanced at an average of $6.5 a year, instead of the original $10 a year.
The Federal Reserve also announced that it would begin to use its existing liquidity resources to help repay the debt.
However it did not announce the details of how it plans to do this.
What are the major differences between the debt settlement agreement between Australia and the Federal Reserve?
The US Federal Government and Australia have both signed the US Treasury Debt Relief Program, a deal that requires the US Government to use US Treasury bonds to fund public spending.
The deal is designed to ease the pressure on the US public finances, by allowing the US government to pay off its debt without having to pay interest to the banks which hold its bonds.
However this is not the only issue the US has with the agreement.
The US is concerned about the impact of the Agreement on the economy and the debt-to-GDP ratio in the country.
In order to ensure that the Government does not default on its debt it is also looking at whether the agreement should be modified.
The Government has already said that it will not renegotiate the agreement due to concerns over the terms.
However there is another aspect to consider when considering whether to renegotiate: whether the US could impose restrictions on the agreement if it was to breach the terms of the contract.
It is not entirely clear what would happen if the US made the Government pay interest on the debt to foreign banks, and if this resulted in a loss of $1.5 trillion in value for the Government.
Would it trigger an inflationary spiral?
While the US does not see the agreement as a breach of the Debt Relief Agreement, it does have an interest in ensuring that it does not.
This is because it is believed that the United States is preparing to introduce a US-backed global trade war that could have significant negative effects on Australia.
This could see Australia, which relies heavily on imports from the US for its domestic economy, become more dependent on imported goods, as its trade relationship with the country becomes more hostile.
What if the agreement breaches the terms?
If the agreement does breach the debt relief agreement, it could result in a financial crisis, particularly if the Federal Treasurer were to be forced out of office and replaced by another politician.
What impact could this have on the Australian economy?
As a result of the decision, the US is expected to impose tariffs on Australian imports, including iron ore and steel.
The tariffs could potentially