Last week, the German government was able to issue bonds (“Bunds”) with a yield of 0.07%. That is a negative real interest rate. Few countries can do this: the United States can when it issues Treasuries. What does this mean for business capital costs. Typically the cost of raising capital for companies is a function of the so-called risk free rate (government bond rate). If you an Australian business you therefore pay substantially higher debt cost than a German or United States business since Australian Commonwealth bonds are considerably higher yielding. That means there are fewer Australian businesses that can attract capital since resulting hurdle rates are higher in Australia than those other two countries.
What we now see is business credit constrained by the adoption of Basel 3 rules etc. because of that tighter prudential regulation and more costly because of higher Australian sovereign risk.
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