S&P declares Australia a “one trick pony”

London-based Kyran Curry, the long-time primary credit analyst for Australia at S&P, is back and the news is getting worse. From the AFR:

“The banks are highly indebted, they’re highly leveraged, they are the main vehicle Australia uses to fund its current account deficit…Australia has, as we see it, got some credit metrics that are right off the scale when it comes to assessing Australia’s external position…It’s got high levels of liabilities, it’s got very weak external liquidity and that basically means the banks are highly indebted compared to their peers…They’re benefiting from a safe haven at the moment – nonetheless investor sentiment can turn very quickly…We just worry that at some point, the people who are funding the Australian banks may decide that enough is enough and may begin to lose confidence in the bank’s ability to roll over their debt…That would come through a weakening in Australia’s major trading partners flowing through to a dramatic weakening in Australia’s fiscal position.”

Curry said this could be a two or three year scenario. But he added:

“Anything that weighs on the ability of Australia to bring forward new energy projects and that weighs on its export growth potential, that’s something that would put pressure on the rating. Australia is looking increasingly like a one-trick pony.”

Regular readers will note that S&P has pretty much captured my entire ‘peak Australia’ thesis. It is simultaneously ripping aside the veil of invisopower that regulators have dispersed around the banks and seeing for it is the singularly backward macroeconomic strategy of embracing Dutch disease.  My two great fears.

The last line is the worst. I am of the view that LNG will rationalise – the current set of projects that is – not the fictitious pipeline. That means there is a risk that this is not a two or three scenario at all. Which does offer an answer to the question: why is S&P ramping its warnings now?

Canberra must immediately dispatch to Beijing a high level delegation to demand further stimulus. Perhaps a high-speed rail link from Beijing to the Bush Capital? That way, when they’re ready, the Chinese can relax in comfort on the way down to buy our banks.

David Llewellyn-Smith
Latest posts by David Llewellyn-Smith (see all)


      • Simple take? It is the issue that’s hindering and will destroy our economy. All our wealth has been transferred from individuals to the four banks. At the same time we’ve collectively used that money to do nothing but consume. Hardly a future economic foundation It is THE take.

      • The real question for me is why has it taken so long for a ratings agency like S & P to come out with this?

        Did they learn nothing during the GFC?

        Australia’s banking situation has been evident to most MB readers for a long time.

      • No, H&H, if not for a ridiculous bubble in urban land prices, which is totally de-linked from productivity (it is merely paying a whole lot more than necessary for something no different to what it ever was) Australia would NOT have its massive debt over-hang.

        It IS illogical and unreasonable to discuss the debt overhang while ignoring this most basic reason for it.

    • I suppose against all odds a reflation of ‘everything’ that has kept us afloat in the last decade or so is possible, but nah.. incredibly low chances.

      The thing is, when it all bursts, how do we get out, what innovation or another world war?
      Who will have money to buy all the busted real estate?

      Oh for a crystal ball.

  1. GunnamattaMEMBER

    Well I have a couple of observations.

    One – nothing there to surprise anyone who spends any amount of time here at Macrobusiness (which may well explain why the Far Right Moron Luvvy Hijack Club [as they were so definitively referred to by Velociraptor the other day] puts a lot of effort into smothering discussion here).

    Two – if the acknowledgement is reflective of the consideration timeframes used by ratings agencies then S&P are a long way behind the curve.

    Three – I reckon their 2-3 year timeframe is right outside. There is an election due in about a year, and that may unfold in, and be heavily related to, an overtly melting economy.

    • Far Right Moron Luvvy Hijack Club

      Don’t you worry, they are on the job:

      Warning: Labor putting us on the path to Spain: Andrew Bolt blog

      If you go down to the comments, you’ll notice a familiar name at ** Thu 15 Nov 12 (08:38am) **. It seems some commentators have strayed too far from the wing nut blog Mother Ship and landed here :).

      Guys (you know who you are), If any of you are planning to head back there, can you please inform the (obviously) economics illiterate Andrew Bolt that Kyran Curry was specifically talking about private debt and private banking system being very similar to the Spanish situation.

      Therefore Labor didn’t put us on the path to Spain; It was Howard/Costello who did that and Labor government saw this as an easy route to power and is merely following on the same path.

      • Yep. The pseudo-conservatives live in a fact-free world.

        Reagan portrayed himself as conservative. He was, in fact, the modern prophet of profligacy, the politician who gave moral sanction to the empire of consumption. Beguiling his fellow citizens with his talk of “morning in America,” the faux-conservative Reagan added to America’s civic religion two crucial beliefs: Credit has no limits, and the bills will never come due. Balance the books, pay as you go, save for a rainy day—-Reagan’s abrogation of these ancient bits of folk wisdom did as much to recast America’s moral constitution as did sex, drugs and rock and roll.
        ANDREW BACEVICH, The Limits of Power: The End of American Exceptionalism

      • GunnamattaMEMBER

        Cant see that mate. I have blocked my browser from accessing anything to do with Facebook and News Limited. Stops FB using up my internet to report back to the mothership what sites I go to, and frees my mind from consideration of the posse of gargoyles who festoon News papaers around the world (although I do miss the AFL commentary)

      • You’d think that Andrew Bolt would have learnt from his court case where the judge found that it wasn’t so much what he said (freedom of speech), rather, the judge found what he said was factually wrong was the issue. Yet he’s gone and done it again. Clearly freedom of speech does not need to be fact based in the MSM (but we all knew that anyway).

  2. Well it’s hard to have this discussion without a thought towards what the proposed solution is. eeek.

    Nice pic – could form part of a ‘how we see ourselves (one of 3d1k’s tough man mining pics); how the world sees us (one trick pony) series.

  3. Canberra must immediately dispatch to Beijing a high level delegation to demand further stimulus

    I know just the man!

    • Would that be the gentleman who suggested the great red hope was trying to “rat f**k” us?

      Perhaps someone who doesn’t speak the language would be a better choice 🙂

  4. So why in the opinion of S&P is Australia rated triple Heeyyy? (Apolgies to the PM). CRA’s are always wise after the fact.

    We’ve been a wun treeck pawny for some time now

    • Since the late 80’s at least, realistically.

      I guess nobody saw the mining boom ever ending? Its different this time etc..

  5. I assume he is talking about our banks dependency on foreign sourced funds to lend to the Australian household and business sectors as I am not aware that our banks capital adequacy is any less than other OECD nation’s banks.

    Or is he talking about gross gearing distorted by the low risk weighted capital behind housing loans?

    What specific metrics is he talking about?

    If that is S&P view, are we on negative ratings watch? If it’s not the S&P official view why has he gone public with his view.

    (It’s a bit hard for us self funded retirees who don’t have an employer to provide AFR subscriptions.)

    • Only problem is the conflict of interest and lack of any disclosure thereof: Nothing in there about the “Fifth pillar” bank campaign that he is involved in with Mark Bouris. He is using the AFR bully pulpit to argue for banking “reforms” as if he is a neutral observer.

      • All I am pointing out is the non-disclosure of ANY potential conflicts of interest like any good journalist with integrity does. Period. Nothing more, nothing less.

        We do not know what CJ’s personal economic interests are. So let us not make any guesses on that. For all you know, he could be long AUD in his private holding, so his reason for wanting higher interest rates.

      • with all respect Mr Mav on that basis we should all disclose whether we rent or own homes!!!

        ..When I am given the bully pulpit in the AFR to write opinion pieces on renting vs buying, I will. 🙂

      • Pardon my suspicion.. but you sound/smell like an astroturfer. What’s with the Chris Joye reference/links all over this blog?

    • I prefer David Bassanesse myself, CJ drifts into territory which he should leave well alone (defence mainly) and should probably leave personal finance and strategy alone too, and stick with economic analysis. There’s probably a reason why he’s not behind the paywall.

      I’ve gone back to reading the weekend AFR – its definitely improved – but I hope they don’t become too much like The Australian.

      • I stopped reading both Carr and Joye more than a year ago. Their drivel was beyond what I can take and their take so one dimensional at the time that I would have trouble believing that either can be truly analytical but I will never know because I don’t read them.

        • Same here.

          Carr’s writing seems to be more right wing opinion pieces than business news reporting.

      • Yes and Andrew Bolt is also widely read.

        That doesn’t mean they are an independent or unbiased source of information.

  6. Jumping jack flash

    “That way, when they’re ready, the Chinese can relax in comfort on the way down to buy our banks.”

    Love it.

    And not just the banks, but most of the houses too.

    Not to say it will happen tomorrow, but I believe there will come a day sooner rather than later, when the banks will not be able to roll over all their debt mountain. There will be no blood left in the stones that are their debt slaves either, due to costs of living – electricity set to increase another 15% where is THAT money going to come from?

    The only solution will be to print and give to the banks, or to liquidate the leveraged assets on a massive scale.

    Of course this assumes we have pressed the “ZIRP forever” strategy button on Capt. Glenn’s control panel, and that effect has worn off.

    Without mining on the table, this is all we got. Better send that delegate, post haste!

    • Incidentally JJF, whether or not there will be the 15% rise in energy bills you mention, that should only equate to about $300 a year for the average household.

      That sort of money is unlikely to put many over the edge. Anyone who is tipped over by $300 a year is so close to the limits that any number of things could wipe them out.

      It’s trendy to criticise energy bills but in % terms they are a fairly small amount of housefold expenditure. Most people spend more on booze.

      • Jumping jack flash

        I’m not earning $300 extra a year, and my budget is razor thin already. Sure I could trim something out of the budget to pay for rising electricity costs but that would mean other sectors will suffer. Kids music lessons could be removed. What about the music teacher?
        The missus could pay for a few more things in the budget instead of getting her hair done once a month and spending up at the shops. Poor salon owner. Poor retail.

        Am I one of those that could be tipped over the edge? Likely yes.

        There are many where the edge is closer than anyone cares to realise. Money grew on trees for so long that we think we’ll just find it when we need it – lying around on the ground or clogged up in some storm water drain.

        The money is fast disappearing out of the country and out to sea.

  7. Hi,
    I’m an irregular reader of Macrobusiness, and I genuinely have no idea what is meant here:

    ” It is simultaneously ripping aside the veil of invisopower that regulators have dispersed around the banks and seeing for it is the singularly backward macroeconomic strategy of embracing Dutch disease. ”

    I suspect that this is the sort of thing that would make sense if I had read all of David L-S’s previous posts and understood the patois.

    Could someone explain it to me? Specifically, I am having a hard time discerning which aspects of current policy the author things should be changed to accommodate what he sees as the likely future trajectory of the Australian economy.

      • OK, thanks.

        Is the implication that regulators should prevent domestic banks from funding their liabilities with offshore borrowing? Or that they should be required to maintain higher capital ratios?

        • Is the implication that regulators should prevent domestic banks from funding their liabilities with offshore borrowing?

          It is a bit late to unscramble that omelette.

          Or that they should be required to maintain higher capital ratios?

          For Higher capital ratio AND TRANSPARENT macro-prudential regulations (80% mortgage LVR limit etc), like those found in other jurisdiction like Canada.

          IMHO, it will be RBA+APRA’s blatant lack of transparency viz other jurisdictions that will ultimately drive away international bond investors away from our banks. RBA/APRA should read up on Stiglitz’ information asymmetry theory.

      • Thanks.

        I often just feel as if I am getting a partial picture by reading individual MB posts without having read the entire archive.

        • Good that you raised that point, mattc. Terms should be clear and accessible to readers.

          As a constant reader of this blog, I’ve thoroughly enjoyed and benefited from the analysis, and it filled such a gap in economic and policy analysis around Australia.

          What I think is needed now is some sort of formal outline of what MB thinks should be done – a policy proposal that summarises and synthesises their ideas, and to show how these ideas reach the goals that policymakers are trying to achieve (at the moment, the big one is productivity, for example). I know that MB advocates (just to name a few):
          *macroprudential rules
          *abolishing negative gearing
          *slowing the mining boom (3-5 yrs ago) and diversifying the economy and preventing a hollowing out, by….how exactly? RSPT, sovereign wealth fund (not feasible at the moment, so we want actual potentially viable solutions proposed), ..?
          *et al

          MB is obviously very widely read and influential. it seems to have progressed its thinking as the blog has grown older. Maybe it is time to formalise some thoughts, and show that its ideas are implementable, given political realities, and consistent with each other, and show how they will address major policy challenges and realities. It could form a part of the blog, sort of like a statement of principles or policies that it advocates.

          Short of that, I am looking forward to the yearly introspective that MB performs to assess what happened in the year,what they did good/bad, and where they plan to take the blog in the future (and for what purpose), (and perhaps an analysis of some of the more active commenters).

      • Actually it has come to represent the full gamit of regulatory obfuscation:
        – endless repo
        – hidden risk models and dodgy capital ratios
        – the preferance for opaque supervision over transparent rules
        – the constant self-congratulation
        You name it…

      • You could put a “New to MB/FAQ” link at the top of the home page with reference to the glossary and other background items.

  8. In the interests of transparency I suggest that the term be dropped from the lexicon and replaced with something less obscure-and less off putting to new readers.This is not a secret society-is it?

  9. I have just checked S&P website (restricted access).

    The S&P Banking Industry Country Risk Assessment Update: November 2012 rates Australia’s banking industry in the second group. Only two countries are ranked higher, Canada and Hong Kong. France, Saudi Arabia, Switzerland and Singapore are on the same ranking as us.

    The other 80 banking systems analysed are regarded as higher risk by S&P

    Australian Commonwealth is still ranked AAA stable for Foreign Long Term.

    What gives?

    • Just S&P jawboning in response to Treasury/RBA’s “Move along, nothing to see here” jawboning.

      It seems two can play the same game 🙂

  10. Canberra must immediately dispatch to Beijing a high level delegation to demand further stimulus.

    Unnecessary at the moment. The Chinese Oligarchs have not yet worked out a reliable way to line their own pockets from boosting consumer spending. So continued infrastructure to nowhere it must be.

  11. the rba has indicated its focus on stimulatng the the housing industry with further interest rate cuts. so the bottom line is that the banks will indirectly be supported by current rba policy.
    how long for and to what extent the the housing industry could support the whole australian economy is another matter.

  12. If our banks have trouble rolling over our debt, the first solution is to offer a ‘government guaranteed’ : privatize the profit, socialize the risk. This is what happened during GFC.

    As the first solution is no longer viable, the second solution is for the RBA to print.