No credit crisis, Thanks. We're Australian.

[Andrew_A]

An interesting article from Paul Kedrosky.

There is a true keeper of a gloating column in Monday's Wall Street Journal from an Australian journalist explaining how wonderful, sound, and profitable her country's banks are, and how Australians long ago figured out that not everyone needs a home, etc. etc.

Really. That's fascinating. She should, me-thinks, pay a little more attention to the capital structure of her own banks. Sure, they carry AA ratings, which is nice, but ratings are made to be broken.
Specifically, there are two risks in Australian banks.

First, they depend far too much on wholesale funding. Something like 60 percent of bank funding in that country comes from debt markets, and almost half of that figure comes from international debt markets (which is an increasingly meaningless distinction). According to the IMF, Australian banks have $222-billion in short-term debt which must be turned over every 90 days. Admittedly, these are banks with far fewer stresses than your average Icelandic bank, say, but with short-term credit markets studying their collective navel for a month or three, turning over that debt at anything other than usurious terms is going to f-ing hard. In short, the Australian banks have a mismatch between their funding and their obligations, and as we have learned to our collective dismay, that sort of things bites when you least like it.

The second problem with Australian banks is their reliance on mortgages. Over the last twenty years debt has gone from less than half of average income in the country to more like 1.5 times income. At the same time housing affordability remains crummy, and the country's housing prices have gone into a second boom without correcting for one back in 2002. So, what if house prices fall, which isn't inconceivable given how far they've run in recent years, and given a global recession banging on the door (which will hit Australia harder than it thinks, despite the absurd mantra there that "what China doesn't buy, India will")? A 15% decline in house prices would, according to the IMF, increase defaults to 2 percent, but that strikes me as low given what we're seeing elsewhere, and given a weakening economy. What about a 25% decline and a long-ish recession? The numbers change dramatically.

I'm interested in learning a bit more about this subject, in particular the bolded part and the significance of that number, perhaps some history/precedent if anyone has it?


Note: Kedrosky admits Aussie banks are likely positioned well for those who don't read the whole article, just that he doesn't like the author's lack of respect for what's happening with the credit markets at the moment and the potential impact on those who need that credit.

 

[chilliaa]

Yeah maybe but last time i checked:
*Aussies werent trying to tell the whole world to act like Aussies,
*Our politicians werent saying that they would restore Australia to its rightful place as the leader of the world,
*Our politicians werent telling our domestic population to go out and spend to save Australia (especially as a good proportion of our consumption goods are imported from overseas)
* Our wanna bee political leader was not quoted as transposing words on to an old beach boys song..... bomb bomb, bomb bomb iran, bomb bomb, bomb bomb iran.
*our political leaders dont attend religious meetings in which they state that 'god' demands their involvement in Arab countries because they are "Australian"

 

[WinstonWolfe]

Aussie majors' dependence on foreign credit was discussed in this thread. I have been trying to understand the source of credit that has fueled Aussie property prices for several years, as that's what has determined prices more than any other factor in the last 10 years, imho.

Kedrosky is right. Aussie majors rely on foreign wholesale funds for 31% of what they lend to us. This has been steadily increasing over the last 20 years, as local savings have been channeled into superannuation, other investment (credit fueled), and consumption. The banks validate the trend on the basis it disperses bank risk out of Australia!!! hehehe. Funny how they think foreign risk is lower than domestic....shows their total lack of understanding of the dodgey credit loosening that caused sub prime.

This article is current, concise, and informative about Aussie bank funding.

But don't take my word for it. Maybe you could ask Sim or Mark Bailey.

I have lost all confidence in the RBA and Govt, to represent these issues in an informed manner. Swan bleating the Aussie bank system is sound and well positioned to weather the global credit crisis is utter rot. The banks will not reveal their exposure to toxic debt.... and they can't because much of that exposure cannot be priced due to falling confidence in the assets that cover it. NAB has already had to write off 900m and two independent investment bank analysts say NAB has as much as another 500m-1b to reveal. Add to that their high dependence on short term funds and the rollover risk that entails, and Aussie property prices have a lot of deflationary pressure about to be applied.