There was an article written a week or so ago comparing Australia and Iceland in relation to foreign debt. Although I think the countries are fundamentally different, the article did raise some interesting points.
Following on from this, there is this article http://www.theaustralian.news.com.au...-30538,00.htmlGabriel Stein, of Lombard Street Research, weighed in with this, after noting that Australian household debt had reached 177 per cent of gross domestic product, almost a world record: "It is amazing that in the midst of the biggest commodity boom ever seen they have still been unable to get a current account surplus. They have been living beyond their means for 10 years. What worries me is that productivity growth has been very low: they have been coasting after their reforms in the 1990s."
The global financial world is watching the Australian dollar because it holds a key to the great unanswered question of this uncertain era: will the global market punish a currency for its declining interest yield? Or will it reward a currency because of the soundness of its economy? Central banks are acutely interested in the answer.
Evans-Pritchard thinks the early signs are hopeful that the answer is the good one, that nations will be rewarded for having sound economies. But he does not believe Australia can escape the consequences of excess: "Australia has allowed its net foreign liabilities to reach 60 per cent of GDP during a decade-long boom, twice the level of the US. The country will, in effect, have to pay 4 per cent of GDP in the form of rents to foreign asset-holders as the bill for such extravagance falls due."
The bill is falling due. Earlier in the year Australians travelling in Europe would have paid about $1.50 for every euro spent. Today they need $2.10. The Aussie dollar is weak again, despite all the luck of the China boom. This raises a number of awkward questions. Did the lucky country became the greedy country? Did it fail to sufficiently embark on a program of nation-building during the resources boom? Was most of the bonus redistributed as tax cuts, which were spent chasing bigger mortgages, bigger homes, new cars and general consumption, stimulating short-term economic growth but not enough on long-term productivity and higher savings?
During 17 years of unbroken economic expansion and a 10-year commodities boom, it took a lot of people, borrowing a lot of money, taking a lot of unproductive risk, to get to where we are today: a nation with excessive debt and excessive vulnerability to external circumstances barely within our control.
At present, the banks are having to roll over about $75 billion in short-term foreign debt every month and raise a net $5 billion in new foreign funds.The deficit had reached a peak of 6.5 per cent of GDP in the March quarter but was expected to dip back towards 5 per cent as the trade balance moved into surplus. Trade will now swing sharply back into deficit and is likely to push the current account back above 7 per cent next year and may rise substantially higher.
Over the past two weeks, the financial crisis has started to cascade through the emerging world. Iceland, Hungary, Ukraine and Pakistan have all sought emergency packages from the International Monetary Fund.
A long list of other developing nations is at risk, including Argentina, the Baltic states, Bulgaria, Romania, Croatia, Serbia, Turkey, South Africa, Indonesia and South Korea.
They have in common their current account deficits, which are becoming increasingly hard to finance.
Currency markets have been the most visible marker of the loss of confidence. Over the past week, the currencies of Brazil and Mexico have fallen because of concern about commodity prices.
The US dollar and the Japanese yen are seen as the two safe-haven currencies.
The euro is seen to be particularly vulnerable as fears that Eastern European nations will default on their foreign debts strike Europe's banks.
The Australian dollar has been one of the weakest of the major traded currencies, dropping even further against the US dollar than the New Zealand dollar.With our masses of debt, and as our dollar stays low, our banks will of course remain under pressure to refinance expensive foreign debt in what is obviously a very tight credit market. This of course flows onto corporate and personal levels. If we do see a global recession at the bad end of current predictions, and related high unemployment causing a possible ensuing property crash (correction I think certainly), then this will hit the banks from both ends. Not to mention the masses of unsecured debt as well.Banks are likely to pass some of the pressure of fundraising on to corporations while they seek to conserve their own capital.
Bank sources say syndicated loans that are widely used for investment projects and normal working capital are having a harder time winning approval.
This is expected to force companies back into the market to raise funds on their own account.
The cost for companies to raise funds will be prohibitive. The cost of insuring a five-year note from BHP-Billiton against default has blown out to 475 basis points, notwithstanding its massive cash reserves, while the cost for Rio Tinto is up to 610 basis points.
The Itraax index, which measures credit default swap prices for the largest 25 Australian companies is now above 350 basis points, which implies that at least one of the companies is expected to collapse.
Is the market already telling us something, that our government will not, and really can't in order to preserve some form of confidence.
Perhaps, this is just a short term devaluation of our dollar as foreign funds head elsewhere to safety. My economics are sketchy at best, but I'm interested what others think about this?
I do think we are well placed to come out the other side when resource demand recovers, as it surely must, but the longer it takes for recovery may put us in a serious place before that point comes.