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David Murray Warns on Australia’s External Liabilities

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David Murray Warns on Australia’s External Liabilities

Friday, December 3, 2010

In an interview published in Wednesday’s Australian Financial Review (AFR), David Murray, Chairman of the Future Fund and former CEO of the Commonwealth Bank, issued a stern warning on Australia’s high level of net foreign liabilities, which have reached nearly 60% of GDP (see below IMF chart).

IMF+Foreign+Liabilities.jpg

Here’s some of the interview taken from Wednesday’s AFR:

…the assumption that Australia could maintain a high level of foreign borrowings because the economy was underpinned by the mining boom and demand from Asia was worrying. “That’s a very risky position”. Australia’s foreign debt position relative to the size of the economy is higher than that of the United States or France.

Mr Murray admonished politicians for glossing over the risk posed to Australia’s economy from foreign indebtedness. Instead, he said, they had chosen to focus voters’ attention on abolishing government debt. “The debate is all being run at a level that completely ignores this vulnerability”.

If Australia’s economy were to slow, the ability to service those foreign borrowings could be affected. There is also the risk that the cost of foreign capital could rise further, which would be felt by many through higher domestic mortgage rates. Banks’ foreign borrowings have funded Australia’s housing boom…

It’s refreshing to hear these views being expressed publicly by Mr Murray, even if he was one of the people responsible for Australia’s housing/debt addiction. Let’s not forget that Mr Murray was at the helm of the CBA in the late 1990s when it ignited a price war amongst the banks by slashing its variable mortgage rate (remember "equity mate"?). Let’s also not forget that the CBA is the second largest issuer of offshore wholesale debt as well as Australia’s second largest mortgage lender behind Westpac.

As I have said on multiple occasions, Australia’s housing bubble has been fuelled by:

1 an increased emphasis on mortgage lending relative to other forms of lending (e.g. lending to businesses); which has been funded through

2 heavy offshore borrowing by Australia’s lenders, led by Australia’s big four banks (see below chart).

Total+Offshore+Funding.jpg

This approach to banking worked fine whilst global credit conditions were benign and household debt levels and asset prices were rising. Rising home values in the early 2000s made Australians feel richer, spurring consumer confidence, spending and employment growth. An economic boom followed and a positive feedback loop was created whereby households took on more debt and housing values rose further, causing the process of confidence, spending and employment growth to repeat.

But the process of debt feeding asset prices feeding confidence, consumer spending and employment growth cuts just as deeply on the way down. And the onset of the Global Financial Crisis (GFC) looked as if it was going to be the catalyst that turned the party into one giant hangover.

The GFC showed Australia just how vulnerable it is to external shocks. With the securitisation markets seizing-up and Australia’s banks unable to roll-over their maturing wholesale funding, the Australian Treasury and Reserve Bank were called upon to: (1) guarantee the banks’ wholesale funding; (2) provide unprecedented liquidity support via the repo market; and (3) buy-up securitisation issues; all in the name of keeping credit flowing into the Australian economy (particularly housing). The Government also provided heavy support to the asset-side of the banks’ balance sheets – i.e. the home values providing collateral against mortgages - via their temporary increases to the first-home buyer’s grant; the relaxation of the rules on foreign ownership of residential property; and a significant increase in the immigration intake.

These measures worked well to reflate the housing/credit bubble and delay the inevitable deleveraging that will follow. But by further increasing housing values and debt, the authorities have likely made the problem much worse, and ensured that the pain on the way down will be more severe than if they had let the bubble deflate on its own accord.

To Mr Murray’s credit, he also advocates a new comprehensive banking inquiry to “allow a cool, calm examination of the system” – something this blogger, Houses and Holes and Delusional Economics are pushing for (see the Son of Wallis Challenge).

Unfortunately, our calls for a warts-and-all inquiry on Australia’s financial system are likely to fall on deaf ears, particularly given the Treasurer, Wayne Swan, is expected to make an announcement on banking competition on Sunday, which is likely to result in some form of hair-brained government guarantee of the RMBS market. An announcement by Swan on Sunday would provide yet another example of poor, reactive policy making by this Government, since it would also pre-empt the outcome of the Senate Inquiry on Banking Competition, which is due to report on 31 March 2011.

And if the minimum eligibility criteria set by the Australian Office of Financial Management (AOFM) for its purchases of RMBS is any guide, then Australia’s taxpayers are in trouble (see below).

AOFM+Securitisation.jpg

95% LVR; $750,000 loan size; 10-year interest only. WTF? Hat tip to Tasmanian Real Estate Trouble for pointing this out.

Even worse, there is a rumour that the AOFM will "become an investor, and price leader, in subordinated tranches of mortgage-backed securities rather than restricting itself to AAA-rated senior debt, as it does now." That is, Australian taxpayers will buy the high risk sh*tty loans that will default first. Yeah, that worked out real well for Fannie Mae and Freddie Mac. Sub-prime anyone?

Hold on to your wallets ladies and gentlemen. Here comes the Wayne Swan shake-down.

Cheers Leith

http://www.unconvent...australias.html

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It’s refreshing to hear these views being expressed publicly by Mr Murray, even if he was one of the people responsible for Australia’s housing/debt addiction. Let’s not forget that Mr Murray was at the helm of the CBA in the late 1990s when it ignited a price war amongst the banks by slashing its variable mortgage rate (remember "equity mate"?). Let’s also not forget that the CBA is the second largest issuer of offshore wholesale debt as well as Australia’s second largest mortgage lender behind Westpac.

That was a really good article!

Maybe it is my Christian upbringing coming to the surface but I do not understand why bears in general have to when agreeing with a point of interest or sound argument made by anyone around housing also bring out all their dirty washing oif the past. In my opinion that it comes from someone in the hotseat while we ran this debt up makes it all the more convincing to the general punters out there.

Edit: and yes I am guilty of the above too! Perhaps though as things turn to sh*t it might be more important than ever to play the ball generally and not the man. i.e. as this thing goes mainstream there will be lots of info out in teh mainstream too. This is a good thing.

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The economy of PIGS are different to each other but the real big thing in common is the net foreign debt (international investment position), I didn't remember Portugal and Spain were even worse then Greece, there is a hell of a lot more money that can leave those 2 country leading them to other 2 bailouts.

Anyway, there are only other 2 countries right in middle of PIGS on the IIP and they are NZ and Australia :thumbdown:

All the others, including USA are in much better shape. I think the long term currency rate is very much determined by the IIP, this sxplain the strength and solidity of the Japan yen and the Swiss Francs

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shh dont remind em or we maybe next.

Nah, speculator don't care much about long term fundamental, AUS and NZD had imbalanced IIP for long time and could take another 10 year or more before they'll play a significant role, The important thing is to remind it to Swanny, Battellino &C. Speculator will enjoy the profit playing dowwn the market and the AU$ from the bad AUS IIP when something will happen to AUS economy, like commodity price/volume demand drop and/or home prices dropping significantly. For Greece the needle popping the bubble was cheating on budget deficit, for Ireland was the home price/credit bubble, for Portugal and Spain could be a contagion from Ireland with their fundamental similar to Greece with a public debt getting out of control and fundamental too much out of control to avid a bailout. In NZ the government is doing much more then Australia to bring things back in balance, it will still take them time

Edited by boz

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And look at the other country (apart from Australia) with an unprecedented advantage from high commodity prices; norway (assuming thats what NWY stands for?)

They like us have low public debt but they have not had a private sector debt led housing bubble.

Amazing that economic prosperity does not mean you have to have a housing bubble supported by masses of private debt.

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And look at the other country (apart from Australia) with an unprecedented advantage from high commodity prices; norway (assuming thats what NWY stands for?)

They like us have low public debt but they have not had a private sector debt led housing bubble.

Amazing that economic prosperity does not mean you have to have a housing bubble supported by masses of private debt.

Norway is far smarter then Australia, first they don't have the massive immigration policy that spread the wealth around more and more. Norway also create a massive sovereign fund that invest out of Norway to preserve the exchange rate from any "dutch disease" I think those money are mean to use as pension payments down the road. Also if you measure the disposable income pro capital Norway would be far better then Australia

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Norway is far smarter then Australia, first they don't have the massive immigration policy that spread the wealth around more and more. Norway also create a massive sovereign fund that invest out of Norway to preserve the exchange rate from any "dutch disease" I think those money are mean to use as pension payments down the road. Also if you measure the disposable income pro capital Norway would be far better then Australia

Well that to me sounds far more prudent than what Australia has done.

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Well that to me sounds far more prudent than what Australia has done.

here is a link to the pension fund of Norway.

Quite massive with over 500 bil US$ for a population of less then 5 mil (over 100k$ per head), It would be enough money to buy a house for each family in Norway, but luckily they don't do it otherwise home prices would probably go to 1+ mil$ each...:rolleyes:

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here is a link to the pension fund of Norway.

Quite massive with over 500 bil US$ for a population of less then 5 mil (over 100k$ per head), It would be enough money to buy a house for each family in Norway, but luckily they don't do it otherwise home prices would probably go to 1+ mil$ each...:rolleyes:

In Australia we are going to give each family 20k to buy their first home. A much more prudent use of our savings generated by a once in a lifetime commodities cycle.

I mean who would of thought a government would actually use the excess funds generated form a boom to store wealth for a rainy day.

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In Australia we are going to give each family 20k to buy their first home. A much more prudent use of our savings generated by a once in a lifetime commodities cycle.

I mean who would of thought a government would actually use the excess funds generated form a boom to store wealth for a rainy day.

RSPT and future fund. Hows the RSPT traction going out west? I think taking the billions of profit offshore and in private cabals is going well.

If not just uncork Twiggy "working man" Forrest and it will be fine.

Bit-o-man clobber on TV "Luvya Twiggy", Bob's your uncle.

Dumb c**ts. A nation of dumb c**ts.

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Norway is far smarter then Australia, first they don't have the massive immigration policy that spread the wealth around more and more.

From Wikipedia:

"In 2009, the Norwegian net migration rate was at 43346"

"However, in March 2009, the Australian Government announced a 14 per cent cut in the 2008-09 permanent skilled migration program intake from 133 500 to 115 000"

Norwegian population: 5 million, Australian 22 million.

Per Capita Norway is out in front there.

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I mean who would of thought a government would actually use the excess funds generated form a boom to store wealth for a rainy day.

It is well documented what are the negative consequences of a resource boom, you can just google "dutch disease", a sovereign fund for resource rich countries is not an option but a "must do" if you care of long term prosperity.

May be the key of Norway proosperity is population, with immigration at 1% they had a very nice and steady sustainable growth, probably Australian politicians will see this chart as too boring...;)

post-268-066604900 1291665982_thumb.png

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It is well documented what are the negative consequences of a resource boom, you can just google "dutch disease", a sovereign fund for resource rich countries is not an option but a "must do" if you care of long term prosperity.

May be the key of Norway proosperity is population, with immigration at 1% they had a very nice and steady sustainable growth, probably Australian politicians will see this chart as too boring...;)

post-268-066604900 1291665982_thumb.png

I have always maintained we should not have reduced tax rates, or at least not as far as we have for this very reason. Trouble is what I have grown to learn is the government is so useless with money that the stupid :censored: probably would have been handing it out to buy existing homes.

We will not always have a minerals boom and when it ends better than instead of a huge structural deficit we would have a huge savings pool that could be used to support aggregate demand during the fall. Could it be that Norway is actually adopting Keynesian policy through the cycle rather than just using it in the gluts?

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RSPT and future fund. Hows the RSPT traction going out west? I think taking the billions of profit offshore and in private cabals is going well.

If not just uncork Twiggy "working man" Forrest and it will be fine.

Bit-o-man clobber on TV "Luvya Twiggy", Bob's your uncle.

Dumb c**ts. A nation of dumb c**ts.

You see him breaking up that fight too...

Anyway on the RSPT, the only issue I see is it sets the government up for yet another failure when the minerals boom leaves us. Sure if it was all going to be saved and their was an expectation that it would not be a permanant lift in government revenues. Royalties at least are volume based so the revenues are far more stable. Once the mines are built they generally keep on pumping out volume the reason the minerals cycle on the way down sees mineral prices fall fast. The supply side is very unresponsive. It is relatively elastic but takes a long lead time to get going and then inelastic on the way down.

What happens though when these companies as they do for many years make next to no money?

I guess the idea of an RSPT to balance an economy is not a bad one but if you come to rely on this revenue, look out. We would be even more foolish than the Irish relying on development money to sustain government revenues. We would be getting our cream from the two cyclical industries going in town. Absolute madness if they rely on it. Save it like the Norwegans and it is a good idea.

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