IMF Hints: ‘SELL Australia!’
Ah, there’s nothing quite like the opinion of a world-famous bank, is there?
Australia pretty much goes unnoticed by the rest of the world.
We’re a big developed economy.
But still small enough that if shit hits the fan, it won’t affect the rest of the world.
So the international press don’t really talk about us too much.
Except that lately, we’ve been attracting the attention of all the wrong people.
Maybe they’re getting ready to Sell Australia too…
Top world bank says we’re done for
That’s how a high-ranking International Monetary Fund (IMF) analyst, Dr Thomas Helbling, described our housing market last week.
Other words that spring to mind are fragile, flimsy, rickety and…crucial.
Next to mining, our buying and selling of houses to each other has propped up our banking system.
Let me put this in perspective for you.
Our big four banks make up a quarter of the Australian Securities Exchange.
That means the value of our Aussie banks can literally move our market.
And of course, those stock market gyrations can be caused by our housing market.
So much so, that Helbling claims the Australian government will need to boost infrastructure spending to offset the Aussie housing market contraction.
Furthermore, the IMF reckons our economic growth will tally 2.1% this year…well undershooting our own Reserve Bank of Australia’s (RBA) forecast of 2.8%.
In other words, once again the RBA has read our economic tea leaves wrong.
Going on record
The comments from the IMF point to much lower Aussie economic growth.
And it’s a worrying sign that we are on the radar of a bunch of international bankers.
The question for you is: What do you do with this information?
How is the opinion of an IMF bureaucrat on the other side of the world relevant to Aussies?
More to the point, the IMF completely missed the last financial crisis back in 2008. So why should we trust its analysis this time?
Well, let’s start with the latter.
Ratings agencies and global banking institutions like the IMF and the Bank for International Settlements (BIS) called the 2008 financial crisis completely wrong.
Neither the IMF nor any research firm actually said the last financial crisis was coming.
If I remember correctly, the IMF and BIS (publicly) wadded in with their opinions and views only as the crisis was unravelling in late 2007.
The outcome of the financial crisis, however, was the IMF’s creation of a bunch of rules that coerce financial institutions into sharing information. It’s a fascinating topic, but I’ll have to delve into that another day.
The point is, the lack of public statements on the fragility of the financial system from the IMF and the BIS was savaged in 2007 and 2008.
Both shared their concerns about the state of the economy, but they were whispers, not statements.
Ordinary people felt duped that risky sectors weren’t highlighted earlier.
So, consider the IMF’s opinions being run in mainstream papers — like The Australian Financial Review and The Age — as a bold warning.
The IMF is telling the world that Australia’s housing market looks dicey.
This is the IMF putting its point of view on record.
Essentially, the IMF has put itself on the right side of a future housing market collapse in Australia.
However, the analysis from the IMF wasn’t just on housing.
It was all centred around the underlying sickness in the Aussie economy.
Wage growth is low. Our savings rate is low. Infrastructure projects aren’t big enough to replace growth from housing projects.
Here’s the thing.
While this may just be one banker’s view, it trickles down the drain.
This feeds into sentiment, which in turn brings more scrutiny to the Aussie market.
And this sort of negativity may be just about to hit us where it hurts.
Wrong time to be popular
Aussie house prices have been falling since mid-2017.
We are 18 months into the drop. How much lower we have to go remains to be seen.
Our banks are keen to lend again though.
Interest-only loan terms for investors has been doubled to 10 years at some of the big banks. And the Commonwealth Bank of Australia joined a whole bunch of other banks and lowered its loan rates this week.
Yet our banks’ desire to fire up those lending machines once more…comes hot on the heels of international ratings agencies getting ready to downgrade our banks.
Perhaps it’s all that negative sentiment from the IMF.
Or perhaps places like Moody’s and S&P Global Ratings have been doing their own research, and have come to the same conclusion.
This week, S&P there is a one-in-three chance it’ll downgrade the credit ratings for our Aussie banks.
Sure, the rating would likely only drop one notch from A+ to AA-.
That would still rank our banks above major US bank Wells Fargo & Co.
But the smallest rating drop from international ratings agencies affects the interest rate at which our banks can borrow.
The better the credit rating, the cheaper our banks can access wholesale debt.
However, one notch down can impact the interest costs for our major banks by a few basis points. And a few basis points add up when you are talking about billions of dollars.
Australia is well known for its miracle economic growth.
We’ve defied downturns. And found innovative ways to survive globally crippling financial crises.
Suddenly, we’re being picked apart. And all the things international banks are picking on are interconnected. If one drops, it takes the other with it.
And I show you exactly how that works here.
Until next time,
Editor, The Daily Reckoning Australia