Australia Sees Biggest Surge in Borrowing Since 1980

Reddit

February begins with a reprieve. Bond insurer MBIA told American investors it had more than enough capital to keep its triple A credit rating. The company still lost US$2.3 billion in last year’s fourth quarter (or $18.61 per share). But the big worry is that if MBIA loses its ratings, the US$652 billion in bonds it guarantees might have their ratings reconsidered by S&P, Moody’s, and Fitch.

For its part, S&P says losses from securities linked to sub-prime mortgages will be US$265 billion before it’s all over. Seeing as how we’re at US$90 billion in bank losses already, that means we’ve got just US$175 billion to go.

You have to take these loss estimates with a handful of salt. After all, this is the same ratings agency that slapped the highest credit rating possible on sub prime debt to begin with. But there are obviously more losses in the pipeline for banks, brokers, and bond insurers. A study from J.P. Morgan says bond insurers have at least US$41 billion in losses to realize, and that a downgrade of the bond insurers would force banks to write down another US$70 billion.

These are all pretty huge numbers. But for the day, they don’t seem to matter. Stocks rallied. And good for them. A resolute cheerfulness in the face of near certain destruction is nearly as admirable as it is stupid. But who are we to argue with the market?

Seriously, there is a very small chance that the Fed’s rate cuts and the U.S. government socialist spending binge is enough to restore global confidence. But we wouldn’t be betting on it. The de-leveraging of the world economy is going to take some time, and cost billions more, and leave investors with frayed nerves for most of the year.

Did someone say there was a credit crunch? Here in Australia we’ve just seen the biggest surge in borrowing since 1980. Total credit growth was 16.5% last year, according to Reserve Bank figures released yesterday. Business credit grew by a walloping 24.3%.

You can partly explain the strong rate in business credit by looking at the bond market. That is, businesses couldn’t sell bonds last year to finance spending (because of the credit crunch) so they went the more conventional route, band lending and pre-arranged lines of bank credit. Let’s hope they spent it on something productive.

Total credit grew by $260 billion. Business borrowing was $141, while households added another $117 billion to the tab. That’s an 11% increase over last year.

Is there any doubt in your mind now that Australia has a debt problem, just like America? The silver lining is that the government-fat with GST revenues, stamp duty, and resource royalties-only had to borrow $2 billion. Okay, maybe a lead lining. But you can see an obvious trend: Australians are truly, madly, deeply in love with debt.

Hey. Where are all the homeless people? One of the perplexing aspects of the housing debate is the insistence that there is a housing shortage and that we need to release more land and build more houses. If housing inventories were so perilously low, why don’t we see families living in the Royal Botanical Gardens on St. Kilda Road? It’s a lovely spot.

The Housing Industry Association reported a 1.3% fall in new home sales last year. It was the second month and fourth year in a row that new home sales declined. HIA reported that apartment sales actually grew by 5.1%, but the overall rate was dragged down by the 2.9% decline in sales of detached homes.

Why aren’t Australians buying new homes? Is it because there aren’t enough of them? Or is it because they are too expensive? Hmmn. You tell me. Or post your own thoughts on our handy new message board. The volume of e-mails and comments has increased so much we don’t have time to respond to all of them. We do read them, though. And if you want to share your ideas or just have a good argument with your fellow readers, head to the message board.

What a strange financial world. It was the worst January for the Australian share market since 1876, according to AMP economist Shane Oliver. Asset prices are falling. But prices for food, fuel, health care and nearly everything else seem to be rising. Inflation is on the march in nearly every continent (except Japan). In Europe, it has reached a 14-year of 3.2%. It runs at that rate or better in both Australia and America.

And now the Fed is probably set to lower rates again and again in the States. In Japan, monthly wages fell by 1.9% in December, the fastest pace in three years. After so many years of trying to escape deflation, Japan may be slipping back into it.

That sets us up for lower real rates (and possibly negative interest rates) in two of the world’s three largest economies. Only Jean Claude Trichet in Europe looks like holding (or even raising) European interest rates.

So here’s the key question as we say goodbye to January and greet February with a warm smile: will we see a revival of global carry trades? And if so, where will the money go? Will global investors borrow in yen and dollars and pour the money into higher yielding commodity currencies like the Canadian, Australian, and New Zealand dollars? And how much of the borrowed money will find its way into gold and oil?

The market did not offer us any clues overnight, with gold trading in the mid $920s and oil steady at $90. There were no major moves in the currency market either. But the pressure is building for the next move. Inflation is massing its forces. Global capital flows are responding to interest rate movements and heading toward higher, firmer ground. We’ll see where they go next week…

Dan Denning
The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
Reddit

Leave a Reply

10 Comments on "Australia Sees Biggest Surge in Borrowing Since 1980"

Notify of
avatar
Sort by:   newest | oldest | most voted
Cluster
Guest
Local governments and councils are addicted to high real estate prices in Australia. They will do everything to prevent deflation. Why? Because of the ever increasing tax revenue collected from new and existing houses. Council fees are calculated from the every person’s property value. Regardless of whether a person sells or not they have to pay more. Deflation in housing prices means less taxes. Can’t have that. I would like to buy a house but prices have just recorded another 20% jump in my home city. Wages are not growing anywhere near that amount, so every buyer seems to be… Read more »
christina
Guest

Hello there, how do we get to the messageboard? :-)

Frank Grimes
Guest

All I ask is who is coming up with the ever larger sums of money to pay the inflated house prices plaguing all of Australia? Mining company execs and employees must own the equivalent of small cities’ worth of property! But jokes aside, it really looks like the “greater fool” policy is hitting Australian housing in a big way. How long until the greatest fool can’t make the repayments?

Mr_Clean
Guest

Yes agree with above. I have been watching the UK debt, housing markets and the similarities are striking. Even the London housing market is “crashing” at this moment. It seems to me the only argument to counter this in Aus is resource exports to China. But even the Chinese economy seems to be slowing. So the million dollar question is where is the money to support the ever increasing house prices in Aus coming from, and when will in it run out ?

mojohand
Guest
Dom
Guest

I too would like to buy a small house – people are crazy paying the prices at the moment – house speculation and negative gearing rort!

i hope they jack interest rates thru the roof!

Coffee Addict
Guest
There are few fundumental differences between the US and Australian property markets – except that housing is Australia is less affordable, and the resources boom is preventing a collapse in some centres. Interest rate are going up – because of the resources boom and this will significantly impact default rates. There is of course demand for premium locations, many of which are still occupied by frugal pre-baby boomers. In a nutshell, I expect Aussie interest rates to rise by 0.5% over the next 12 months – and inflation to increase very significantly in the longer term. Politicians can’t and won’t… Read more »
Rici Smith
Guest

Simplistic view maybe, but i think its because of government red tape (planning permits, stamp duty etc), the market cannot funtion in an efficient manner.

pengers
Guest
I agree Rici – but I think a bigger problem is stamp duty. It is a hugely punitive tax for anybody who is asset rich and income poor (e.g. how many elderly widows are living in a prime four bedroom house). For these people (and I don’t blame them) paying $20-50K to downsize is too big a price – so they stay in their big homes with big gardens and big maintenance bills. I would like to see stamp duty abolished and replaced with a general land tax payable by all. This would actually encourage many people to ‘trade’ to… Read more »
christina
Guest

Thank yo very much to the person who told me where the message borard is, I appreciate it :-)

wpDiscuz
Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au