No Credit Crisis, Thanks. We’re Australian.

There is a true keeper of a gloating column in Monday’s Wall Street Journal from an Australian journalist explaining how wonderful, sound, and profitable her country’s banks are, and how Australians long ago figured out that not everyone needs a home, etc. etc.

Really. That’s fascinating. She should, me-thinks, pay a little more attention to the capital structure of her own banks. Sure, they carry AA ratings, which is nice, but ratings are made to be broken.

Specifically, there are two risks in Australian banks. First, they depend far too much on wholesale funding. Something like 60 percent of bank funding in that country comes from debt markets, and almost half of that figure comes from international debt markets (which is an increasingly meaningless distinction). According to the IMF, Australian banks have $222-billion in short-term debt which must be turned over every 90 days. Admittedly, these are banks with far fewer stresses than your average Icelandic bank, say, but with short-term credit markets studying their collective navel for a month or three, turning over that debt at anything other than usurious terms is going to f-ing hard. In short, the Australian banks have a mismatch between their funding and their obligations, and as we have learned to our collective dismay, that sort of things bites when you least like it.

The second problem with Australian banks is their reliance on mortgages. Over the last twenty years debt has gone from less than half of average income in the country to more like 1.5 times income. At the same time housing affordability remains crummy, and the country’s housing prices have gone into a second boom without correcting for one back in 2002. So, what if house prices fall, which isn’t inconceivable given how far they’ve run in recent years, and given a global recession banging on the door (which will hit Australia harder than it thinks, despite the absurd mantra there that "what China doesn’t buy, India will")? A 15% decline in house prices would, according to the IMF, increase defaults to 2 percent, but that strikes me as low given what we’re seeing elsewhere, and given a weakening economy. What about a 25% decline and a long-ish recession? The numbers change dramatically.

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