Australia’s trek to the polls on Saturday has resulted in a nail biting, too close to call result. At the conclusion of counting at 2am Sunday morning, the ALP had 67 seats, LNP – 65 and the minor parties have picked up five. 13 seats remain in doubt with counting to resume on Tuesday.
The results suggest Australia could be heading for a hung parliament and three years of political deadlock for economic reform and attempts to rein in spending.
Such a deadlock could spell the end of Australia’s coveted AAA credit rating with speculation Australia could be put on credit watch negative within weeks.
The consequent loss of the triple AAA credit rating will not only make government debt more expensive, but it will result in a spate of downgrades for Australian banks and companies and potentially result in the rise of mortgage rates due to banks over reliance of wholesale funding. The downgrade will also be a blow to confidence.
Australia’s total debt surges to 254 per cent of GDP
The loss of our AAA credit rating was going to eventually happen, regardless of the outcome of the election. There has been speculation looming about the loss for months.
An Australian Bureau of Statistics (ABS) release last Thursday tallied another record high for Australian debt levels. Total debt racked up by households, the public sector and business (but excluding finance companies) totaled 254 per cent of GDP for the first quarter to March.
Households’ insatiable appetite for a slice of the Australian housing bubble, and at any cost, made the largest contribution to total debt levels at 125 per cent of GDP. Australian households remain the most indebted in the world as a percentage of GDP. A significant risk is our big banks’ reliance on overseas wholesale funding to support the residential mortgage market. As the world increasingly questions the Australian miracle and recalculates risk, the spreads of this wholesale funding will increase.
According to the Courier Mail, analyst, John Steiner from United States based Hedgeye Risk Management has recommended investors short Australia’s big four banks. He believes the housing oversupply and falling demand has signaled Australia’s housing market is in a bubble and is about to blow.
Business debt now sits at 84 per cent of GDP, while Government debt ticks up to 47 per cent of GDP.
Earlier this year when total debt was only 243 per cent of GDP, Morgan Stanley calculated for every dollar of extra GDP growth, Australia accumulated an extra $9 worth of debt. At the time, Daniel Blake, a Sydney based economist for Morgan Stanley said Australia needs to urgently find other sources of growth that are less debt-intensive rather than the hugely leveraged property market.
“We’re not getting that much growth for the money we’re borrowing,”
» Australia’s debt levels hit record high as households, businesses and governments load up – The Courier Mail, 30th June 2016.
» Australia’s debt problem looks worse than China’s, says Morgan Stanley – The Australian Financial Review, 4th July 2016.