All Posts Tagged With: "aussie banks"

Moody’s has just released a report claiming that Australian banks are the “most exposed” banks in the Asia-Pacific to a worsening of Europe’s sovereign-debt problem. What exactly does that mean?

Well you can forget about today’s modest little overnight rally in the US and Europe. Ratings agency Standard and Poor’s rained on everyone’s parade after the market closed. S&P downgraded 37 global banks. It upgraded two.

You’d think banking would be a low-profit, low-growth business to be in during a Credit Depression. At least we’d think so.

RBA assistant governor Philip Lowe said in a speech in Sydney yesterday that constraints on home building are restricting the supply of homes in Australia. The shortage is one factor keeping prices up. Nothing was said about the lending boom.

The bigger story is that Greece hasn’t been abandoned by the rest of Europe…yet. Europe could probably leave Greece behind and preserve the integrity (such as it is) of the euro as a sound currency. But 50 years of harping on about social justice and economic harmony and humane capitalism is going to make it hard for policymakers to leave Greece to its own devices.

So how does a government fund its spending programs if global creditors begin to turn to other assets? Well, it can have its own central bank “monetise the debt.” But having the central bank buy government bonds with new money is a sure-fire path to currency depreciation and higher interest rates.

That’s just what happened last year. Only then, it was both a dollar and yen carry trade that led to a rise in Aussie assets. Once the credit crisis set in, the yen carry got dropped and investors fled risk assets and piled right back into the greenback and U.S. Treasuries.

Just to recap, government borrowing draws away capital from businesses that might use it to invest in productive projects that generate a real return. What you get in return is higher debt, probably higher interest rates, and people who’ve never really had to earn a paycheck or meet a payroll deciding how to allocate capital. And you still think it’s a good idea?

Let’s also assume that the government cannot borrow its way to larger stimulus payments. With lower spending forecast for government, businesses, and households, you begin to wonder if Australia’s economy has a home grown engine, or if it will rely on something else, or someone else beyond the borders.