FW: Interesting articles on the Australian economy, housing and share market [SEC=UNCLASSIFIED]

[Adhitya G.]

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> Subject: Interesting articles on the Australian economy, housing and share market [SEC=UNCLASSIFIED]
> To: Raymond...@immi.gov.au; Sid.M...@immi.gov.au; Amit.B...@immi.gov.au; Paul.P...@immi.gov.au
> From: Adhitya...@immi.gov.au
> Date: Wed, 29 Oct 2008 09:28:12 +1100
>
>
> Article 1 - Crises come into focus. By Robert Gottliebsen
> PORTFOLIO POINT: The question is no longer about whether the US and Europe
> will be hit by recession, but how long that recession will last.
>
>
> The weekend brought a dramatic show of power from the forces that will
> shape the future local and global business and investment communities. We
> have seen an amazing display: a series of crises suddenly coming into sharp
> focus.
>
> I will start with the housing markets in western Sydney and Melbourne; then
> move to the impact of the mortgage fund redemption freezing on the
> sharemarket and particularly on Perpetual, Axa, and Australian Unity; then
> to the looming collapse of a large number of giant US hedge funds and the
> impact this will have on shares, mineral prices and our dollar; and finally
> to the weekend commentators who keep referring to the danger of a recession
> in Europe and the US when it is already in force. What we seeing on global
> markets is the sharp adjustment of share prices to the reality of lower
> profits.
>
> First to housing. I spent some time over the weekend talking to some
> residents of western Sydney, to be reminded of what a tough housing market
> is like. That market fell before the rest of Australia. One man made
> $150,000 on his first house and a couple of years back decided it was time
> to switch to a much better house for just under $500,000 in the Sydney
> suburb of Fairfield. Lenders rushed to give him the $350,000 he needed.
> Today, that house would struggle to sell for $300,000, so he is underwater.
> Many smaller houses are for sale in Sydney’s west for as little as
> $250,000. Safety in many areas has become a real issue and is deterring
> buyers.
>
> In Melbourne an enormous 1100 houses were offered for auction this weekend.
> Just over half were sold. The rest hang over the market. Prices were down
> in September and will fall again in October, though lower interest rates
> and the first-home buyer’s grant will help the bottom end of the market.
>
> In my view we are going to see a big rise in sales of investment and
> holiday properties from those who used the equity in their homes to borrow
> large sums. More noticeably, there will be an exodus from very expensive
> houses by those who can no longer afford them. It's important for both
> buyers and sellers of residential properties to understand that banks have
> changed their lending criteria, and so there is less money available to
> buyers from banks. In addition, the non-bank lenders have dried up. That
> means buyers simply do not have as much money to spend and that pushes
> prices down.
>
> At the airport on Saturday, the chief of a small non-bank lender, who has
> been working with a number of wealthy private families, rushed up to tell
> me how people should be fostering a close relationship with their bank
> manager; it’s one of the great assets a business can have today. Banks are
> helping clients in trouble but are reluctant to finance new business
> purchases. The exodus of the mortgage funds from the market will depress
> the value of smaller commercial properties.
>
> On the ABC’s Inside Business, Perpetual chief executive David Deverall
> described how he visited a Perpetual call centre to talk directly to
> Perpetual clients who are in a state of panic. That’s exactly what a chief
> executive should do in such circumstances. It is highly likely Axa,
> Australian Unity and Colonial First State had similar experiences in their
> call centres.
>
> Whenever a company has to freeze redemptions of one product, it normally
> affects sales and redemptions of all products, including share and property
> units. Those call centre reactions are just the first sign of trouble
> ahead. I hope I am wrong, because it could lead to something much more
> serious.
>
> With the best of intentions, Kevin Rudd and Wayne Swan acted in haste over
> the bank guarantee issue and bungled it. They will need to rectify their
> mistakes quickly or the ramifications will spread. For most Australians,
> bank guarantees are not necessary and those who want them should pay a
> price, whether they deposit $1000 or $1 billion. A restricted number of
> other security houses should also be able to market government guarantees
> on debt products for those who want them; it should be like travel
> insurance.
>
> Then over the weekend, of course, we saw the biggest problem of them all:
> the escalation of the forced sales by hedge funds and other leveraged
> investors. I had hoped the forced selling was over, but clearly there is
> more to go. The comparison with the Dutch Tulip Mania, which peaked in
> 1637, is very apt. What we are seeing is the collapse of two tulip booms at
> once: the debt securities boom and the hedge fund collapses. But it is
> important to underline that this is more than a hedge fund collapse. In
> fact, investment banks and brokers are all selling their long positions and
> not take new ones on except in exceptional circumstances. What we are
> seeing is a massive deleveraging of the stockmarkets. Of course, the "debt
> securities tulips" and the "deleveraging tulips" are linked because a large
> number of banks were stupid enough to lend four and five times equity to
> hedge fund gamblers on oil, copper, Australian dollars, US shares, our
> mining stocks and other shares. The banks may be big losers in both
> debacles.
>
> Perhaps the executives who gambled loan money and lost should be required
> to repay their salaries. Meanwhile, the question that more informed
> analysts are asking is not whether there will be a US and European
> recession, but rather how long the recession and the continued economic
> downturn will last.
>
> My guess is that it will be at least two years, but it's more likely to be
> three or four years, despite the fact that the new US President will spend
> and spend to turn the US around.
>
> -----------------------------------------
>
>
> Article 2 -
>
> Today Iceland: Tomorrow Turkey, Hungary, Australia, New Zealand, Spain,
> U.S.?
> PrintShare
> Delicious Digg Facebook reddit Technorati
> Nouriel Roubini
>
>
> The recent speculative attack against the Icelandic currency and the
> incipient run on its banks is no news (actually a deja-vu as my
> co-author Brad Setser says) to students of financial crises in emerging
> market economies; Brad and I wrote an entire book about it. A combination
> of a large and growing current account deficit, driven in part by a credit
> boom and an asset bubble (with housing bubbles leading to an excessive
> growth in real estate investment and an excessive increase in private
> consumption and fall in private savings) can be deadly if it goes bust and
> it triggers a domestic and/or international run on a banking system with
> large foreign currency liabilities and little liquid reserves. The
> combination of weakening fundamentals and illiquid banks can lead to
> a panicky currency and liquidity run: we saw it in Mexico in 1994, in East
> Asia in 1997-98, in Brazil in 1999 and in 2001-2002, in Turkey in 2001.
> Add to these problems, a fiscal imbalance and high public debt and you may
> even get a sovereign debt crisis, as in Ecuador, Russia, Argentina,
> Uruguay.
>
>
> So, today it is Iceland to be in trouble. But which other economies -
> emerging or advanced - look in part like Iceland today? The list is clear:
> Turkey, Hungary, Australia, New Zealand, Spain, United States. What all
> these countries have had in common in recent years?
>
>
> First, a large (relative to GDP) current account deficit, a large
> (relative to exports) external debt and a significantly overvalued
> exchange rate.
>
>
> Second, an asset bubble in the housing sector.
>
>
> Third, a fall in the private savings rate and an increase in the
> consumption to GDP rate, as well as a boom in real estate investment that
> are all driven by the housing bubble; these, in turn, lead to a worsening
> of the current account.
>
>
> Fourth, a credit boom that has fed this asset bubble and that can make
> their banking system vulnerable to a housing bust.
>
>
> Fifth, a partial cross border financing of the current account deficit via
> the short-term cross border flows to the banking system that currently
> is mostly in domestic currency (but that in some cases used to be
> in foreign currency).
>
>
> Sixth, a relatively low stock of liquid foreign exchange reserves relative
> to the cross border foreign currency liabilities of the country (the U.S.
> and advanced economies being an exception as they have little forex
> reserves but also little foreign currency debt).
>
>
> On top of all these vulnerabilities, some but not all of these
> countries -  the U.S. in particular - have also a large fiscal deficit.
>
>
> Thus, is it pure financial "panic" that explains the recent contagion from
> the Icelandic currency to the currency and debt markets of Turkey,
> Hungary, Australia, New Zealand? Suddenly, in all these countries
> investors are realizing that the force of gravity of a large current
> account deficit eventually dominates the carrry trade of interest rate
> differentials. It is true that the large current account deficits of these
> countries and their housing bubbles have been known for a while. But
> markets and investors have a strange way of sometimes waking up - as they
> did in Thailand in 1997 - and realize that the problems in one country -
> Iceland today (Thailand in 1997) - are very similar to those in other
> countries (East Asia in 1997 and the "usual suspects" above today).
>
>
> Does this mean that the eventual trigger for the adjustment of the U.S.
> dollar has arrived? Not yet for the U.S. dollar; but certaintly you see
> now the beginning of the stress on the currencies of Hungary, Turkey,
> Australia, New Zealand. The U.S. is only partiallly different: still the
> dominant reserve currency; still being supported by massive intervention
> by China, other Asian countries, oil exporters and other emerging
> economies with current account surpluses; still with limited reserves but
> also with limited foreign currency debt.
>
>
> But you can play your luck only for so long, especially when - unlike all
> these other economies - you also have a large and growing fiscal deficit
> and you are increasingly financing it with new short term debt that is
> 100% purchased - on net - by non-residents that are now subject to a
> serious currency risk. It used to be argued that short term foreign
> currency debt is dangerous when you have little foreign currency reserves
> as liquidity runs can occur; while domestic currency debt is less risky as
> you do not have the same rollover/liqudity risk; it was also argued that,
> as the currency risk is held by the non-residents holding your local
> currency debt, no nasty balance sheet effects of a devaluation can occur.
>
>
> But these argument are probably flawed: if most of your domestic debt is
> in local currency and is held by non-residents, these investors face a
> large currency risk. Thus, once they start to expect a large depreciation
> of your currency, their incentive to hedge their currency risk and dump
> your assets and your currency becomes very large. Then, both a currency
> crisis and a run on your assets - be it liquid bank deposits or short term
> government debt -may occur - with nasty effects on your financial system
> and the ability of your government to finance itself. So, the fact that
> U.S., Spain, Australia, New Zealand and now even emerging markets such as
> Turkey and Hungary are financing themselves in local currency may be of
> little comfort. Runs on currency and liquid local assets may still occur
> with severe and disruptive effects on currency values, bond markets,
> equity markets and the housing market.
>
>
> I have been warning for a while - as Morris Goldstein did - that the new
> crises in emerging market economies may take a different form from the
> traditional ones where large stocks of short-term foreign currency debt
> and low levels of forex reserves could cause a run and an external debt
> crisis. Instead, runs on the short-term domestic local currency debts of
> governments and banks could still occur - even in the absence of those
> traditional external vulnerabilities - and lead to a new type of financial
> crises. The developing events in Iceland and, possibly, in other emerging
> market economies, suggest that it was wishful thinking to believe that
> currency crisies, contagion, financial crises and runs were a thing of the
> past.
>
>
> In the meanwhile U.S. policymakers - both at Treasury and even some, but
> not all, at the Fed - live in this LaLa Land dream that the U.S. current
> account deficits and fiscal deficits do not matter and that the U.S.
> external deficit is all caused by a global savings glut or is actually a
> "capital account surplus" as it allegedly represents the foreigners'
> desire to hold U.S. assets.  They - and financial markets and investors
> - may soon wake up from this unreal dream and face a nightmare where the
> U.S. looks like Iceland more than they have ever fathomed.
>
>
>
>
>
>
> Article 3 - Why real estate spending could make Australia the new Iceland
> Paul Sheehan | October 19, 2008
>
>
> On July 30 Hans Redeker, head of foreign exchange strategy at BNP Paribas,
> Europe's biggest investment bank, predicted: "The Aussie is going down,
> big time."
>
>
> Back then - it already seems like a long time ago - the Australian dollar
> was sitting majestically at 97 cents to the US dollar, which was taking a
> battering. But the Aussie did, indeed, go down, big time. Within three
> months it had crashed by 33 per cent to US65.5 cents. Now Redeker has
> issued another warning to Australia. We'll get to that. But first, let's
> look at his track record.
>
>
> December 2006: Redeker predicted a sharp recession in the United States,
> saying the condition of its housing market was worse than the experts were
> stating and the flow-on effects would be much worse than predicted. That
> was almost two years ago. He was right.
>
>
> January 2008: he predicted the Aussie dollar was facing two years of
> decline, and expected to see it fall to 66 cents. He was right. He also
> predicted a rise in financial market volatility, higher inflation
> worldwide, higher interest rates in Asia, weakening demand for Australia's
> minerals exports from China, and a weaker sharemarket in China, all of
> which would drive down the Australian dollar. Since then, the Shanghai
> sharemarket has crashed 50 per cent from its peak.
>
>
> October 2008: two weeks ago Redeker repeated his claim that abundant
> foreign money had been available to Australia and too much of it had been
> spent on real estate, creating a speculative bubble: "The easy money went
> straight into real estate - Australia will now have to generate 4 per cent
> of GDP to meet payments to foreign holders of its assets. This is twice as
> high as the burden faced by the US."
>
>
> After the Australian Reserve Bank slashed key interest rates by 1 per
> cent, Redeker also told London's Telegraph that he was concerned about
> what the Australian Government may do: "Yes, Australia has a fiscal
> surplus, but that does not offer as much protection as people think. If
> the Government boosts spending further, the current account deficit will
> spiral out of control."
>
>
> And what has the Rudd Government just done? Boost spending.
>
>
> There was certainly no discussion of the current account deficit spinning
> out of control, or Australia's excessive debt, when the Prime Minister,
> Kevin Rudd, launched his $10 billion economic stimulus package last week,
> nor any from the Opposition Leader, Malcolm Turnbull, who offered
> in-principle bipartisan support.
>
>
> It gets worse. Redeker continued: "There is a risk, however remote, that
> Australia could face some of the foreign funding difficulties we have seen
> in Iceland."
>
>
> Iceland! Iceland was the most leveraged economy in the developed world
> when it became the first economy to be bankrupted by the credit crisis.
> You do not want to be mentioned in the same sentence as Iceland unless the
> discussion is fishing or blondes.
>
>
> After quoting Redeker, the Telegraph's global business columnist, Ambrose
> Evans-Pritchard, weighed in with his own commentary: "The immediate
> problem for Australia's banks is that they gorged on offshore US dollar
> markets to fund expansion because the interest costs were lower. They were
> playing on a huge scale with leverage. European banks face much the same
> problem as dollar liabilities come back to haunt, but Australian lenders
> have pushed their luck even further."
>
>
> Gabriel Stein, of Lombard Street Research, weighed in with this, after
> noting that Australian household debt had reached 177 per cent of gross
> domestic product, almost a world record: "It is amazing that in the midst
> of the biggest commodity boom ever seen they have still been unable to get
> a current account surplus. They have been living beyond their means for 10
> years. What worries me is that productivity growth has been very low: they
> have been coasting after their reforms in the 1990s."
>
>
> The global financial world is watching the Australian dollar because it
> holds a key to the great unanswered question of this uncertain era: will
> the global market punish a currency for its declining interest yield? Or
> will it reward a currency because of the soundness of its economy? Central
> banks are acutely interested in the answer.
>
>
> Evans-Pritchard thinks the early signs are hopeful that the answer is the
> good one, that nations will be rewarded for having sound economies. But he
> does not believe Australia can escape the consequences of excess:
> "Australia has allowed its net foreign liabilities to reach 60 per cent of
> GDP during a decade-long boom, twice the level of the US. The country
> will, in effect, have to pay 4 per cent of GDP in the form of rents to
> foreign asset-holders as the bill for such extravagance falls due."
>
>
> The bill is falling due. Earlier in the year Australians travelling in
> Europe would have paid about $1.50 for every euro spent. Today they need
> $2.10. The Aussie dollar is weak again, despite all the luck of the China
> boom. This raises a number of awkward questions. Did the lucky country
> became the greedy country? Did it fail to sufficiently embark on a program
> of nation-building during the resources boom? Was most of the bonus
> redistributed as tax cuts, which were spent chasing bigger mortgages,
> bigger homes, new cars and general consumption, stimulating short-term
> economic growth but not enough on long-term productivity and higher
> savings?
>
>
> During 17 years of unbroken economic expansion and a 10-year commodities
> boom, it took a lot of people, borrowing a lot of money, taking a lot of
> unproductive risk, to get to where we are today: a nation with excessive
> debt and excessive vulnerability to external circumstances barely within
> our control.
>
>
>
>
>
> Regards,
>
> Adhitya (Adi) Gautama
> Finance Team
> Corporate Systems (SAP) Support
> Border and Corporate System Branch
> Department of Immigration and Citizenship (DIAC)
> Phone: (02) 6264 4934
>
>
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