The Australian Politicians Got What They Deserved

australian home with banknotes
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What a debacle. The result of the election on Saturday (or lack of one) is shaping up to be the worst possible outcome for the nation.

While the final result is still unknown, at this stage it’s looking like a hung parliament…or a very slim coalition government that will have to do deals with minor parties to get policies passed into law.

Turnbull’s strategy of calling a double dissolution election has backfired spectacularly. The Senate looks like being even more unwieldy now. Australia is set for three long years of more political uncertainty. Whoever gets in will be unable to govern effectively.

Any meaningful structural reform is off the agenda. Make no mistake; this is bad news for the economy, and for markets.

For months now, I’ve bemoaned the lack of leadership in Australian politics. I’m not alone. This is why you’re seeing the rise of minor parties. It’s a protest vote as much as anything.

Looking at the ballot paper on Saturday gave me a real sense of despair. There were no good choices. This is what happens when the politics of conviction give way to the politics of fear.

Scare campaigns, dishonesty, misinformation and pork barrelling were the hallmarks of the long campaign. The terrible result tells you exactly what Australians thought of that. The politicians got what they deserved.

Given the poor outcome that this election result represents, it might seem strange to say this, but I think Australia got it right. We need to send a message to politicians that they just don’t cut it.

Unfortunately the message doesn’t seem to be getting through to the thick and impenetrable egos. Malcolm Turnbull’s speech on Saturday night didn’t even acknowledge what the result said about him or his policies. Even if the Coalition gets in, there is hardly a mandate for their policies, which means the life of a ‘governing’ party will be very difficult.

This comes at a very precarious time for the Aussie economy. We have no real economic strategy, apart from hoping lower interest rates continue to push up house prices which, in turn, increase consumption.

The problem is that this form of growth relies predominantly on increasing debt levels. Australia now has the highest household debt levels in the world (as a percentage of GDP), so there are clearly limits to this growth strategy.

And with the government budget stuck in deficit, there is no capacity for fiscal spending to offset any slowdown in household spending. The uncertain election result has only made this reality starker. As The Australian reports this morning:

Global ratings agencies are expected to formally warn the incoming government that Australia will lose its AAA credit rating unless firm action is taken to narrow the budget deficit.

S&P Global is likely to be the first to move; the agency is scheduled to hold a ratings committee meeting later this month to review Australia and has already flagged frustration with the slow progress in tackling the deficit.

The first step would be to put the AAA rating on “negative outlook”, meaning it would be downgraded within 18 months in the absence of corrective action.

Government debts levels, as a percentage of GDP, are not overly concerning right now. But the agencies have an eye on the high levels of household debt, and they know the government would need to backstop this in the event of a house price crash and/or recession.

Australia is a large net debtor nation. Our net foreign liabilities are just over one trillion dollars. A decent chunk of this borrowing occurs through our banking system, and must continually be rolled over.

If the government loses its credit rating, foreign creditors will see our banks as riskier investment propositions. They will pay more to borrow; interest rates will increase despite the efforts of the RBA to keep them low.

In fact, the RBA meets tomorrow to decide on whether to cut rates. My guess is they will keep them on hold. But you never know…monetary policy is still the only game in town.

As far as markets go, today’s reaction will be interesting to see. Futures trading in New York on Friday suggested a strong day today for the ASX 200. But that could change after the election debacle. I wouldn’t be surprised to see the market finish lower. I’ll have more to say about the market reaction tomorrow.

While Aussie stocks should be in for a down day, the rest of the world seems to be in some sort of bizarre Brexit denial. Stocks continue to rise in the US, Europe and the UK. For what reason? I’m not sure. The hope for monetary stimulus? Or the hope that an exit might not even take place?

Who knows, but I’m wary of this rally. It smells weird.

Meanwhile, the authority of the EU looks like taking another blow from Italy. The Financial Times reports:

Italy is prepared to defy the EU and unilaterally pump billions of euros into its troubled banking system if it comes under severe systemic distress, a last-resort move that would smash through the bloc’s nascent regime for handling ailing banks.

Matteo Renzi, the Italian prime minister, is determined to intervene with public funds if necessary despite warnings from Brussels and Berlin over the need to respect rules that make creditors rather than taxpayers fund bank rescues, according to several officials and bankers familiar with their plans.

I mentioned last week that Italian banks suffered heavily on the back of the Brexit vote. They are in poor shape. But instead of recapitalising with fresh equity, the Italians want taxpayers to foot the bill. And this is coming from a country with the highest government debt levels in Europe already. Insane.

Maybe Australia isn’t so bad after all…

Cheers,

Greg Canavan,
For The Daily Reckoning

Greg Canavan
Greg Canavan is the Managing Editor of The Daily Reckoning and is the foremost authority for retail investors on value investing in Australia. He is a former head of Australasian Research for an Australian asset-management group and has been a regular guest on CNBC, Sky Business’s The Perrett Report and Lateline Business. Greg is also the editor of Crisis & Opportunity, an investment publication designed to help investors profit from companies and stocks that are undervalued on the market. To follow Greg's financial world view more closely you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails. For more on Greg go here.
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