Well, one thing is certain, we know Fairfax economics writers Peter Martin and Tim Colebatch read the Alphaville blog on the Financial Times website where the report referred to in their Fairfax story this morning first appeared.
But why they chose to highlight a report that was full of muddle-headed old-fashioned ideas about the Australian economy and financial system is less clear. Colebatch has a penchant for bad news about the Australian economy, but Martin is reliably one of our most sensible media economists.
That Alphaville highlighted the lightweight report from Variant Perception is no surprise: Alphaville reckons Australia is heading for a crunch. “That the Australian economy may be in trouble will not be news to FT Alphaville readers. We’ve been warning for a good while that the country is uniquely exposed to the commodity super-cycle, an overvalued currency, a real-estate bubble, not to mention the Chinese slowdown.
“Yet what we may have overlooked is the remarkable similarity between Australia’s external finance position and that of the European periphery, a point now being made the analyst team at Variant Perception — a boutique research analysis shop.”
Who is “Variant Perception”? It’s based in Charlotte, North Carolina (where Bank of America is based, oddly enough). Since house prices have only started rising recently in Charlotte for the first time since 2008, perhaps they calculate property bubbles a bit differently there. But there’s no detail on who they are, their track record or backgrounds. But who they are doesn’t particularly matter: the report just recycles the usual very American list of hedge fund favourite gloom stories about us: China, mining boom, property bubble, overvalued dollar and the weak external account (high debt resembling the so-called eurozone periphery economies such as Spain and Greece).
This attitude, and the delight Alphaville took in it, reflects a certain North Atlantic view of Australia, which can also be gleaned, with extra ideological flavour, from the Economist Intelligence Unit. There is a sneering resentment that the Australian economy hasn’t had a recession for over 20 years. Here’s an example, from Aphaville’s report of the report.
“The Australian banking system is highly reliant on external funding and will likely become dependent on the RBA for liquidity in the near future. Our view is that the RBA will have to become much more activist in supporting its major banks as the structural slowdown in China and the housing market continues.
“We believe the RBA will ultimately be forced to take similar action to developed market central banks either by aggressively cutting interest rates or propping up banks through domestic open market operations akin to the liquidity injections seen by the ECB.
“Quantitative easing is also a possibility if the RBA is forced to buy bank debt to try to stave off a financial crisis. Under such a scenario, the AUD would fall considerably.
“But, even though the situation looks good optically, the fact of the matter is Australia would have to backstop its banks in the event of a crisis, and this low number masks the real debt burden. This is exactly what we have seen and are seeing with Spain, which is in the process socializing its financial sector’s debts. We remain of the view that rates in Australia will converge to the lower bound currently set by the rest of major central banks. This process has been progressing for the last 6m-12m and in our view it will continue.”
The North Atlantic view of the rest of the world is through the prism of high debt, poorly-regulated and irresponsible banks, flagging property prices, credit crunches and political inaction. It doesn’t comprehend markets that differ from that model. So they offer clichéd economic phrases, like “Dutch disease” (um, the Netherlands still has a AAA rating), obsess over our reliance on foreign capital, run the umpteenth foreign-sourced and unevidenced claim about a property bubble and peddle the belief that Australian banks must be as shonky as European and American banks.
But the suggestion that Australia is on the verge of going the way of Spain (come on down Campbell Newman!) is a new and particularly ludicrous addition to the mix.Australia’s foreign debt is overwhelmingly issued by private companies (some of whom come from the US, others from Japan, Europe and China, as well as locals). Our level of sovereign debt is low, only 14% of GDP. The foreign holdings have been mostly bought in the past year to 18 months by central banks and other blue chip investors looking to diversify their assets out of US dollars, the euro and sterling.
Australian mortgage arrears are very low. We have the fourth largest pool of pension (superannuation) savings, around $A1.3 trillion, in the world. Super here is almost entirely based on defined contributions, unlike many of the schemes in Europe and the UK which are defined benefits and therefore have incurred huge losses (and liabilities) for companies and governments. Variant Perception and Alphaville overlook that this pool of savings helped recapitalise Australian banks and companies in 2008-10 to the tune of well over $120 billion while in other countries companies in media, manufacturing, retailing and the like went broke, or are still crippled. And the banks in many countries (such as the US, UK and Europe) had to be rescued by governments with direct capital injections, which continue in the UK and Europe.
Australian banks are conservative and highly capitalised, household savings are currently just over 9% and banks are funding credit growth through domestic deposits and only issuing new bonds to cover maturing debt, as the Reserve Bank has made plain (and so have the banks). The Variant report and Alphaville fail to mention those points, not to mention that the CBA just posted a record profit of $7 billion and has more than enough capital.
Yes iron ore prices are falling and so are coal prices, yes the outlook for China isn’t as solid as it was at the start of this year. Yes other parts of Asia are not as solid-looking either. The outlook for the Australian economy has changed for the worse as 2012 has gone on. But then, so has the outlook for Europe and the US. The poor Brits are currently hoping the Olympics will save them from another extended recession.
And Alphaville and Variant seem to think that a weakening dollar would be a problem. Much of our manufacturing, retailing and tourism sectors would give their right arms for an 80 US cent dollar. That, by the way, is what happened in 2008, but Alphaville and Variant don’t seem to remember that. Indeed, the one real risk is what happens if the Aussie dollar doesn’t start depreciating? That is a real policy problem for the RBA and the Federal Government, not this collection of hoary economic chestnuts from the 1980s and 1990s from Variant Perception and FT Alphaville.
Peter Martin had least had the sense to pull together for local and fairly critical reaction to the Variant report. “They’ve discovered the current account deficit,” said one commentator, nailing it. “We discovered it in the 1980s and got on with our lives.”
And 24 hours after running the line that Australia’s banks were weak and would need support from the RBA, there was Alphaville, spruiking another bit of research, this time from Nomura, which argued that Australia’s financially strong banks could be candidates to bid for Standard Chartered Bank.
“As fantasy banking M&A goes — this isn’t such an outlandish idea, we reckon,” Alphaville mused, given our banks’ strong share price performance. So, one day Australia’s banks are on the verge of needing bailouts that will send us the way of Spain, the next, they’re candidates to come in and clean up the mess the Brits made of their banking system.
Variant perceptions all right.
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