Tuesday, September 30, 2008

Australia Faces Worse Crisis

Australia Faces Worse Crisis Than America

By Ambrose Evans-Pritchard, Telegraph, UK | 30 September 2008

The world's financial storm has swept through Australia and New Zealand this week amid mounting signs of contagion across the Pacific region. Financial shares were pummelled in Sydney on Tuesday after investor flight forced National Australia Bank (NAB) to slash a £400m bond sale by two thirds. The retreat comes days after the Melbourne lender shocked the markets by announcing a 90% write-down on its £550m holdings of US mortgage debt, an admission that its AAA-rated securities are virtually worthless.

In New Zealand, Guardian Trust said it was suspending withdrawals from its mortgage fund owing to "liquidity difficulties in the market". Hanover Finance— the country' third biggest operator— last week froze repayments to investors. The company said its "industry model has collapsed" as the housing market goes into a nose dive. Some 23 finance companies have gone bankrupt in New Zealand over the last year.

It is now clear that the Antipodes are tipping into a serious downturn. Australia's NAB business confidence index fell to its lowest level in seventeen years in June. New Zealand's central bank began to cut interest rates last week on fears that the economy may have contracted in the second quarter, and is now entering recession. Housing starts slumped 20% in June to the lowest since 1986.

Gabriel Stein, from Lombard Street Research, said Australia could prove vulnerable once the global commodity cycle turns down. It has racked up a current account deficit of 6.2% of GDP despite enjoying a coal, wheat, and metals boom, effectively spending its resources bonanza in advance. Household debt has reached 177% of GDP, almost a world record.

"It is amazing that in the midst of the biggest commodity boom ever seen they have still been unable to get a current account surplus. They have been living beyond their means for 10 years. What worries me is that productivity growth has been very low: they have coasting after their reforms in the 1990s," he said. Australia's Reserve Bank has had to grapple with vast inflows of Asian capital, especially Japanese money fleeing near zero rates at home. Short of imposing currency controls, it would have been almost impossible to stop the inflows.

"The easy money went straight into real estate," said Hans Redeker, currency chief at BNP Paribas. "Australia will now have to generate 4% of GDP to meet payments to foreign holders of its assets," he said. This is twice as high as the burden faced by the US. Both the Australian and New Zealand dollars have fallen hard in recent days and now appear to be breaking down through key technical support against major currencies, including the US dollar. "The Aussie is going down, big time," said Mr Redeker.

The picture is darkening across the Pacific Rim. The Bank of Japan's deputy governor, Kiyohiko Nishimura, said its economy may now be falling into a "technical recession". Household income dropped 2.1% in June compared to a year earlier and manufacturers are the gloomiest since the deflation crunch in 2003. The decision by National Australia Bank to make drastic provisions on its US mortgage debt could have ramifications in the US itself. It opted for a 100% write-off on a clutch of "senior strips" of collateralized debt obligations (CDO) worth £450m— even though they were all rated AAA. No US bank has admitted to such fearsome loss rates.


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