How safe is Australia really?

[frenzel]

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.

http://www.brisbanetimes.com.au/articles/2008/10/19/1224351113115.html

Gabriel 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.

Following on from this, there is this article http://www.theaustralian.news.com.au/business/story/0,28124,24555283-30538,00.html

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.

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.

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.

Is the market already telling us something, that our government will not, and really can't in order to preserve some form of confidence.
http://www.theaustralian.news.com.au/story/0,25197,24500019-2702,00.html

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.

 

[gfresh]

Any rules that apply to the rest of the world, don't apply to Australia... :error:

Unemployment is the key, and at the moment we are in the transition period, where a lot less people are spending, a lot less people have money to splash around, and companies are seeing reduced sales. Reduced sales eventually lead into reduced profits, and reduced profits lead to less spending by companies, and potential staff cutbacks.

2009 will be the reckoning period, whether aye or nay to recession. 6 months in I think it should be clearer which way it's heading.

Looking at the Merrill Presentation in the other thread, amongst other things, it looks like the US will be down for quite a while, longer than probably the early 90's. Often the US has rebounded before we have felt the very worst, but not this time??

 

[numbercruncher]

Yes Growth and Australia really dont seem to fit in the same sentence these days.

Household debt is like some sort of sick joke .


Speaking of, I did hear a joke this week ....


Q. What is the difference between Iceland and Australia ?
A. 6 months

 

[frenzel]

The Merrill stats are very interesting. I've seen some Aus/US comparative data, and we look worse.

We are looking at the worst global credit crisis in 70+ years. Would you be investing in a country as leveraged as ours? The AUS$ could be down for a long time, and the longer this happens, the more pressure the banks will surely be under to pass on the foreign debt costs to consumers. Maybe the shareholders will be happy to wear the cost.

If business costs continue to increase via refinancing and import costs, compounded with declining sales, then this could accelerate our unemployment, and of course further push us into a default spiral.

Interesting

The slump in the currency has confounded even the most seasoned of market commentators. The dollar has even been strongly outperformed by Iceland's hapless krona and Brazil's real over the weekend.

 

[Nyden]

This really is something which has been concerning me for a while, yet I've failed to act. For months I've wanted to bail on the AUD, but for fear of a bounce-back have yet to do so - and was wondering if anyone has employed any sort of currency hedging strategy?

We talk about hedging for portfolios - but what about hedging our savings? What vehicles are available for individuals to easily do so, and to protect us from potentially new all-time lows for our AUD?

I'd love to hear from any individuals who have hedged by buying any foreign currency.

Nyden

 

[Glen48]

On today ABC news at 12 PM they were saying 40% of China's steel mills didn't make a profit last month ( that's the good news) this month they think it will be 80% of their mills who won't make a profit..Iron ore suddenly become Dirt only..
I think getting out of shares and staying out is the best idea... only concern will the Banks hold up???????

 

[CoffeeKing]

Just something general...

Anyone notice how more and more of these types of "links" or "sponsers"
are appearing over the internet...

australian-debt-reduction.com.au (written so as not to link)

What happens when they get trampled in the rush, are the Govt going to help these aswell?

Not associated with above dot.com, nor trying to promote it either

 

[tech/a]

On today ABC news at 12 PM they were saying 40% of China's steel mills didn't make a profit last month ( that's the good news) this month they think it will be 80% of their mills who won't make a profit..Iron ore suddenly become Dirt only..
I think getting out of shares and staying out is the best idea... only concern will the Banks hold up???????

Funny you should mention this.
I buy a lot of steel.

Scrap has halved in price.
Indent for New Year keeps getting adjusted DOWN.
If I wait long enough it will be free---only kidding but it seems that way.

 

[Naked shorts]

Yeah these statistics worry me. I guess its only a matter of time till the government decides the markets can only go one direction (up) and they start trying to hold everything up

 

[Naked shorts]

Here is a chart that concerns me, a weekly of AUD vs Swiss franc (the traditional safe haven currency).

 

[alwaysLearning]

Yes Growth and Australia really dont seem to fit in the same sentence these days.

Household debt is like some sort of sick joke .


Speaking of, I did hear a joke this week ....


Q. What is the difference between Iceland and Australia ?
A. 6 months

Yesterday I walked past a real-estate office and looked at the prices of some houses on the glass window from outside. I noticed that the prices don't really appear to have come down. I saw houses still selling for 600k that didn't look that great. It made me think of who those people are who bought the house at that price in the first place.

This whole period we are going through is a paridigm shift from cheaper credit and a psychology of debt being ok to a psychology that says that we must save and not borrow/spend beyond our means.

I'm not sure where they get this figure from but I read that it takes approximately 9months before something that we see on the stock market today gets reflected into the real economy. If that is the case then I think that we're all mostly royally screwed in this country.

Also, has anyone else been studying body language of the the people making speeches. I saw the speeches when bernanke and pualson were first asked questions by the senate and that was so obvious to see paulson and bernanke sweating very badly. In fact, paulson appeared to be a broken man as he tried to asnwer the question of why the US senate was not made aware of the problem in advance.

At that point I knew for sure that Paulson would not get the 700billion dollar bailout that he wanted under his conditions.

I have watched Ruddy boy and swann when they first had to break it to the Aussie people that Australia was not immune. (THey were both ****ting bricks). I then watched the speech by Rudd as he read his speech to the big businesses like bhp etc, and small business.

Looking at the 10billion stimulas plan it seems that housing is the real focus of this plan IMO. If housing falls apart then a LOT of small businesses will FAIL hard. Because a lot of these small businesses put their house on the line in order to fund their business. IF those small businesss fail then you'll see an increase in unemployment which then would add more pressure to the housing market.

Also, it is obvious that real estate agents want to make money. They are seeing less people buying at the moment. If they want to make sales they'll probably need to reduce the cost that people list their houses at if they want to make money.

So there is downward bias on the property market which will head lower but how low?

If unemployment gets bad in this country then housing will POP and people will be angry as heck.

The china story is an interesting one and I read somewhere that alot of the contracts are still going to go ahead for another 18months. That's good for next year BUT what about after that? If the US is still in recession after 18months then that could be bad news for AUS still.

I don't want to over the do the doom and gloom crap but these are worrying times.

 

[shaunQ]

I live in SE QLD which has had so much development going, and still probably hundreds of estates and residential developments going, not even counting the apartments. But they do look a little slowed of late.

I rent, and have recently been told my house is to be sold, 3 months after I have moved in, from a previous house that was sold on me, which obviously sucks. I'm caught because I want it to crash, but the instability of the housing markets make life difficult with a family, but am at least securely employed.

This state, like WA will be hit hard. All those 2nd/3rd tier mining companies employing thousands, will cut back as their budgets are stretched. Retail and Tourism will sink, and has already which will be devistating enough. The Gold Coast is built on other peoples money.

A massive percentage of the estates were to be bought (and the existing ones owned by) investors from all around the country - trying to get in on the "action" of the boom towns, and all the developers saw so much land and all tried to cash in on the craze.

The boom states have boosted this economy for the last decade, which will hurt the entire economy, adding to the problem.

 

[Glen48]

Those who saw Ch 7 to night would have seen the start of the crunch with top end cars Boats etc going for a song and there will be more.
After that story they had Single Mothers about 18 all saying they need more money because things are bad and they shouldn't be expected to go out and get a job....I had a phone call looking for money I told her we are in a recession and she wanted to know what I meant ... then I realised why we are in this mess and people are spending 177C in every $1 they earn.

 

[gfresh]

Christmas already looking pretty glum. Here is a decent interview with Myer CEO (may have to register for free to view):

http://www.businessspectator.com.au/bs.nsf/Article/Bernie-Brookes-KSTT3?OpenDocument&src=sph

This is a valuable read as to what is happening out there. As a consumer spending nation (buy buy buy), any significant slowdown in spending will have large effects on the economy. This will feed back into itself, etc.

 

[nomore4s]

After that story they had Single Mothers about 18 all saying they need more money because things are bad and they shouldn't be expected to go out and get a job

Yeah I saw that, what a joke. Says everything about the problems in Aust today.

Why should we go and get a job, it should all be handed to us on a platter. Then they whinge about not having enough money to do what they want.

And what about when they were asked what they will do with the bonus money Rudd is handing out, one of them said - I want a holiday.

 

[Glen48]

Lateline last night they had a DR, Curry? on some female economist expert who claimed there will not be a recession and things are still booming as she drives past full shops and Cafe's. The Australian economy is still good ..apart from China's steel mills not making a profit and Oz ships being sent back from China.......

 

[numbercruncher]

Yup Howard Government created the handout generation and Labor doesnt look like tackling the issue.

Hopefully an economic recession or even better a depression will cure all that ails our society

Humanity needs this period to reflect and plan forward in a sustainable manner.

 

[alwaysLearning]

Lateline last night they had a DR, Curry? on some female economist expert who claimed there will not be a recession and things are still booming as she drives past full shops and Cafe's. The Australian economy is still good ..apart from China's steel mills not making a profit and Oz ships being sent back from China.......

lol, she sounds crazy :screwy: (although I did not see the show so I don't know if that's a little out of context or not)