Is Australia the “next Greece”?

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So says the London Telegraph, perhaps smarting from an Ashes thumping:

While the rest of the world suffered from the aftermath of the global financial crisis, Australia’s economy – closely tied to China – appeared impervious, with full employment and a healthy trade surplus.

However, a collapse in iron ore and coal prices coupled with the impact of large international mining companies slashing investment has exposed Australia’s true vulnerability. Just like Saudi Arabia, which is now burning its foreign reserves to compensate for falling oil prices, Australia faces a collapse in export revenue.

…For an economy which in 2012 depended on resources for 65pc of its total trade in goods and services these dramatic falls in prices are almost impossible to absorb without inflicting wider damage. The drop in foreign currency earnings has seen Australia forced to borrow more in order to maintain government spending.

The respected Australian economist Stephen Koukoulas recently wrote of the dangers that escalating levels of foreign debt could present for future generations. Could a prolonged period of depressed commodity prices even turn Australia into Asia’s version of Greece, with China being its banker of last resort instead of the European Union.

Mr Koukoulas points out that by the end of the first quarter this year, Australia’s net foreign debt had climbed to a record $955bn, equal to almost 60pc of gross domestic product. Although this is far behind the likes of Greece, which boasts an unenviable ratio of over 175pc, it is nevertheless unsustainable, especially if it is allowed to widen further.

…The problem is that Australia, after decades of effort to diversify, is looking ever more like a petrodollar economy of the Middle East, but without the vast horde of foreign currency reserves to fall back on when commodity prices fall.

Instead, Australians must borrow to maintain the standards of living that the country has become accustomed to, which even some Greeks will admit is unsustainable.

The basic outlines of this are right. Australia has bet on the wrong horse in commodities, has hollowed out the non-mining tradable economy and become a kind of developed economy Banana Republic that can’t grow without borrowing offshore, yet can’t change owing to the paralysing politics of vested interests.

But Australia is not the next Greece for one simple reason. We have a floating currency and it does not. The more the rent seekers in mining and banking slow the reform process the lower the currency will go as what could be a managed process of adjustment simply becomes a market rout instead as the offshore debt grows to crisis point. Eventually the currency turns it around via increased competitiveness.

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We’ll be OK in the long run and at some stage we may even get leadership to help rather that hinder the process. The great Australian adjustment can’t be stopped and it will be very painful but we’ll be much better for it in the long run.

Greece won’t.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.