In terms of government bailouts, Australia has been reasonably protected from the global chaos, but the plunging local currency puts a very different perspective on things. While word equity markets are falling in unison, currencies movements are a relative measure and the Australian dollar is being singled out as high-risk.
At one level it doesn’t make sense for the American banking system to collapse while Australia, with strong banks, watches its currency plunge from US98.5c on July 16 to less than US70c overnight.
Having the world’s most expensive banking system gives does give our local cartel plenty of capital such that the bailouts can be contained to the private system. Indeed, CBA has confirmed exclusive negotiations with HBOS over Bankwest this morning.
Unfortunately, a very strong banking system is the best things that can be said about Australia and Fairfax’s Michael West has focused on several critical weaknesses this morning.
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The current account deficit is our biggest problem. Why on earth are we borrowing $60 billion a year when enjoying the best terms of trade in history?
In a credit constrained world, you don’t want to be saddled with a $620 billion foreign debt when national income is tumbling with commodity prices.
The implications are wide-spread. For instance, you can forget about Wayne Swan’s $20 billion-plus budget surplus for 2008-09. The Feds will be lucky to stay in surplus at all and might even have to support our most debt-laden state, NSW, as it tries to borrow a net $18 million a day.
In a world of utter mistrust in the private banking markets, governments will progressively slash official interest rates, guarantee deposits, nationalise banking and carpet bomb the system with liquidity.
After the weaker financial institutions are nationalised or taken over, this Darwinian system will then focus on the weak government and sovereign issuers, starting with small fry such Iceland. The most immediate problem is terrorism central Pakistan, which is about to run out of foreign reserves and will require more US government support.
In the Australian context, the Federal government will probably be forced to guarantee all deposits, along with the $100 billion-plus debts of the states and their projected $20 billion-plus in new borrowings for 2008-09. State infrastructure spending plans will have to be slashed.
The Howard Government’s decision to strip more than $20 billion in dividends from the Reserve Bank has left Australia with just $30 billion in foreign reserves, which is close to the lowest in the developed world. Check out this list of foreign reserves to partially gauge the relative strength of sovereign states and their ability to bail out banks, guarantee deposits and defend their currencies.
On the plus-side, we should be thankful for David Murray’s caution at the Future Fund in preserving $40 billion in cash and then, of course, we have the fabled $1 trillion in conscripted super.
With the Aussie dollar falling below US70c overnight, super trustees have a unique opportunity to repatriate some US dollars and help domestically recapitalise our banks, buy local mortgage-backed securities and fund the flood of Australian equity raisings that will come in a credit constrained world.
While a new Bretton Woods style agreement is needed, the Europeans showed over the weekend that it is every nation for itself. The biggest asset we’ve got is super, but tens of billions are needed to be brought home to man the barricades.
- Listen to this morning’s gloomy discussion about the crisis with Deborah Cameron on 702 ABC Sydney.