Australian banks are headed for trouble and that will create havoc in the one developed economy that seemed to escape the global financial crisis.
The big news of the week is that Australia's four largest banks had their credit rating cut one notch to Aa2 by Moody's Investors Service due to their reliance on overseas debt markets. Australian banks depend more heavily on overseas for funding than their counterparts in other countries. The cut from Aa1 to Moody's third-highest grade "reflects our view of the Australian banking system's structural sensitivity to conditions in wholesale funding markets," Moodys said.
What's making the problem worse for Australian banks is that Australian housing prices are stagnating. The bubble hasn't quite popped because there is a housing shortage but prices had gone too high. They had reached a point where there was only one way to go.
Economist Steven Keen warns that the end of the bubble could break Australian banks. He points out that real estate loans are a higher proportion of Australian bank loans than for US banks, and their rise in significance in Australia was far faster and sharper than for the US. The problem, he says, is that it is a Ponzi scheme and that Ponzi schemes need people to keep signing up. People won't sign up if house prices are heading down. "It's great fun while it lasts, but all Ponzi schemes end for the simple reason that they must: they aren't 'making money', but simply shuffling debt,'' Keen writes. "When new entrants can't be enticed to join the game, the shuffling stops and the scheme collapses. There are very good odds that, when this Ponzi scheme collapses and house prices fall, bank shares will go down with them."
The big four Australian banks are holding up the share market. When they get hit, so will the market. It's going to get ugly.
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