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little over 20 per cent. foreign liabilities can also be measured relative to the physical capital stock of the country, giving an indication of the proportion of the capital stock being funded by foreigners. this ratio, too, has been relatively steady in australia since the late 1980s, at around 10 per cent. one could argue that housing assets should be excluded from this latter measure, since foreigners ’ participation in the housing market is relatively limited. on that basis, the ratio rose somewhat in the early 1990s, but has been relatively steady since. in short, these measures do not suggest the build - up of any significant disequilibrium in the economy resulting from foreign liabilities. for developed economies with a floating exchange rate and the capacity to borrow offshore in their own currency, the risk from rising foreign liabilities is not that they will cause a traditional balance of payments crisis, but that they will undermine financial stability. the process by which this can happen typically starts with a country, for one or more reasons, becoming attractive to foreign investors. capital floods in, overwhelming the capacity of the economy to use it productively. credit is misallocated and eventually there is some form of a domestic financial crisis. this type of crisis can occur even in highly sophisticated economies, as illustrated by the recent sub - prime crisis in the united states. the policy challenge for countries in this situation is to ensure that the ready availability of offshore funds does not end up distorting or weakening the financial side of the economy. as the recipient of large amounts of offshore funds for much of the post - float period, australia has had to remain alert to these challenges. by and large, it has been able to successfully absorb significant amounts of offshore capital over many years. there are several factors that have contributed to this : first, the country ’ s foreign liabilities are virtually all either in australian dollars or hedged back to australian dollars. 2 australia is able to do this because foreign investors are happy to hold a certain proportion of their assets denominated in australian dollars. this means that australian borrowers do not face foreign exchange risk on the capital sourced from overseas. therefore, if sentiment turns and the exchange rate falls, domestic borrowers are largely unaffected. the large swings in the exchange rate of the australian dollar that have occurred over the past couple of decades in no way threatened the corporate and financial sectors. second, the offshore capital that has flowed into australia has been used essentially to fund high levels of investment. australia uses