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What does Australia’s soaring $500 billion debt mean for the ASX?

Australia’s economic stimulus package measures total $213.6 billion from the commonwealth, $11.8 billion from the states and $105 billion from Reserve Bank of Australia (RBA)-government lending.

The last budget update from the government was the mid-year update that forecasted Australia’s net debt to be around $392.3 billion in 2019–20, or 19.5% of gross domestic product (GDP).

The drastic action will see Australia’s net debt increase to more than $500 billion. So what does this mean for the S&P/ASX 200 Index (ASX: XJO) and All Ordinaries (ASX: XAO)? 

Low interest rates and liquidity 

Before the coronavirus pandemic, the markets seemed to be in an endless cycle of trending higher and higher. The backbone of such strong trends can be attributed to falling interest rates around the world since the GFC (with the United States as an exception) and quantitative easing, flooding the market with liquidity and cash. These 2 factors have stimulated demand for equities, as declining risk-free rates have acted to boost stock valuations.    

And believe it or not, this narrative remains the same. The RBA announced two 25 basis point cuts to interest rates in March, leaving the interest rate at just 0.25%. Likewise, the US Federal Reserve has made dramatic moves to prop up the US economy by cutting its benchmark interest rate to near zero, and wants to initiate the buying of more than $700 billion in Treasury and mortgage-backed securities. 

This further cements the fact that low interest rates are here to stay, and central banks around the world will continue injecting money into the economy.

While these factors all have a very positive influence on stock markets, the elephant in the room cannot be ignored – the coronavirus. Low interest rates and quantitative easing is now being used as a lifeline to keep businesses open and subsidise wages. For the next 6 months, the Australian Government will be paying the equivalent of half the country’s total wage bill.

While there will be significant ramifications for the survival of many sectors and companies, unemployment and economic growth, the last thing investors should be worried about is debt. In fact, you could argue that Australia has a more sensible debt-to-GDP compared to many first world countries. 

Foolish takeaway

The bottom line is that economies around the world will continue to take on more debt and print more money in an attempt to stabilise their economies. If it weren’t for such dire circumstances, the equity markets would continue to trend higher. But in the meantime, uncertainty and volatility will continue to cast doubt over how the markets will perform moving forward. 

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Motley Fool contributor Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.