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Australia

Australia faces worse crisis than America
Gabriel Stein said Australia could prove vulnerable
Ambrose Evans-Pritchard, Daily Telegraph 29/7 2008

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 90pc write-down on its £550m holdings of US mortgage debt, an admission that it 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".

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 6.2pc of GDP despite enjoying a coal, wheat, and metals boom, effectively spending its resources bonanza in advance.

Household debt has reached 177pc 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 4pc 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.

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