Because it is visible, via George Soros at the FT:
“The EU is in an existential crisis. Everything that could go wrong has gone wrong,” he said. To escape the crisis, “it needs to reinvent itself.”
Mr Soros said tackling the European migration crisis “may be the best place to start,” but stressed the importance of not forcing European countries to accept set quotas of refugees. He said the Dublin regulation — which decides which nation is responsible for processing a refugee’s asylum status, largely based on which country the individual first enters — had put an “unfair burden” on Italy and other Mediterranean countries, “with disastrous political implications.”
While austerity policies appeared initially to have been working, said Mr Soros, the “addiction to austerity” had harmed the euro and was now worsening the European crisis. US president Donald Trump’s exit from the nuclear arms deal with Iran and the uncertainty over tariffs that threaten transatlantic trade will harm European economies, particularly Germany’s, he said, while a strong dollar was prompting “flight” from emerging market economies.
“We may be heading for another major financial crisis,” he said.
Meanwhile, years of austerity policies had led working people to feel “excluded and ignored,” sentiment that had been exploited by populist and nationalistic politicians, said Mr Soros. He called for greater emphasis on grassroots organisations to meaningfully engage with citizens.
Hard to argue against any of that. My base case is now an accelerating Italian and European crisis. Nobody knows how bad it will get. MB has always said that Italy was where the EUR faced its toughest test and so it is shaping up.
So, how is Australia prepared for it? If the worst happens and Italy leaves the Eurozone then there are a number of obvious corollaries. Italy owes the Eurozone roughly half a trillion dollars in debt so:
- the new lira will crash;
- Italian banks and government will be insolvent and will default;
- German and French banks will be hit hard (they’re owed about half the debt);
- global counter-party bank risk will explode to higher levels than the GFC (given sovereign debt solvency questions);
- the USD and JPY will launch higher (gold might too despite the strong USD);
- emerging market capital flight will be huge, dramatically tightening financial conditions from Beijing to Caracas;
- global stocks and commodities will crash, and
- deep global recession will follow.
In Australia, the first wave of crisis will bring:
- an Aussie dollar collapse to 55 cents;
- house prices crash 10-20% initially as immigration stops;
- stocks crash;
- household spending freezes, and
- recession.
Subsequently, we will see:
- 100bps of rate cuts, half of which will held back by banks, total mortgage relief will be roughly 15% of that during the GFC;
- fiscal stimulus amounting to $30bn, roughly half of that of the GFC, including presumably FHB grants;
- Chinese stimulus around half that of the GFC offering support to bulk commodities.
That will stabilsie things for while but not enough. Soon enough I expect we would see a double-dip recession as:
- the sovereign is downgraded and forced into fiscal austerity;
- bank bailouts via nationalised LMIs;
- bank funding costs that refuse to come down;
- house prices that refuse to stabilise given higher lending standards than the GFC and minimal interest rate relief;
- stubbornly high unemployment;
- RBA QE and a crashing AUD.
At the end of it we’d be rescued by the collapsed currency. But house prices will have tumbled 30% lower in nominal terms, on their way to halving in real terms over another decade.
These are my best guesses and they will be wrong. Take your pick of the order and magnitude of things. What we can says with reasonable certainty is that it will be much worse than the GFC and will herald the end of Australian exceptionalism.
