Borrowing

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Under Section 62 of the Efic Act, the Commonwealth of Australia explicitly guarantees the due payment by us of any money that becomes payable, including our borrowings from third parties. Efic is rated AAA by Standard and Poor’s (S & P).

The main reason that we borrow money is to fund loans made to exporters or buyers of Australian exports on either the Commercial or National Interest account. We may also need funding to cover developments linked to borrower defaults or calls by lending banks on the guarantees we’ve made – and for these reasons we maintain a diversified funding capability with spare capacity. This strategy ensures our funding model is flexible and robust enough to accommodate a degree of disruption to financial markets and to enable a range of pricing and risk management strategies.

The guidelines for our funding activities are set out in the Efic Act. Under Section 59, we are allowed to borrow or raise money, subject to the written approval of the Finance Minister – and under Section 58, the Finance Minister may lend money to us out of money appropriated by the Federal Parliament. To date, we have funded our activities under the section 59 approval.

One of the core functions of our Treasury is to raise funding at competitive rates. To this end, we borrow in the global capital markets. To fund our lending operations, medium term note (MTN) issuances are used for longer term core funding requirements, while euro commercial paper (ECP) is typically used for shorter dated requirements. Treasury uses derivative products to manage currency and interest rate risks arising from our core businesses, including Treasury’s funding operations.

The results of our funding operations are reported regularly to the Board. We do not take currency exposure on our liabilities — we effectively eliminate this exposure by borrowing in the same currency as the assets or, typically, by borrowing in another currency and using cross-currency swaps and other foreign exchange instruments to remove the foreign exchange exposure. Similarly, we use interest rate swaps and futures to match the interest rate profiles of our liabilities with those of our loans. Our power to enter into derivative transactions derives from our general powers in section 11 of the Efic Act.