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From Staff Reports
Australia's ongoing economic boom – fueled by the continued growth in the Asia-Pacific Region – has left Aussie families less leery of debt, and more vulnerable to an economic shock or recession, Reserve Bank Deputy Governor Ric Battellino stated at a convention in Melbourne yesterday.
At a convention organized by the 'Melbourne Centre for Financial Studies,' Battellino said that Australian households were running a "highly mismatched balance sheet," consisting of property and shares on the asset side of the personal ledger, and a load of debt on the liability side. It's the kind of highly leveraged mix that professional investors use to magnify returns on the upside – but which magnifies and acclerates losses on the downside.
"This balance sheet structure is very effective at generating wealth in good economic times," Battellino told the audience, according to a report by Australia's Age.com newspaper. "But households need to recognise that it leaves them exposed to economic or financial shocks that cause asset values to fall and/or interest rates to rise."
But there's also some good news. Unlike in the U.S. economy, where high debt levels are used to help fuel consumption, the rise in debt in Australia is being taken up by mostly higher-income households, and was used to buy such assets as homes, stocks, and investment properties. That means the debt is backed by assets, which can help diffuse any damage during a downturn, Battellino quite correctly observed.
"It would be a mistake, therefore, to conclude that a rising ratio of debt to income is necessarily a sign of financial stress," Battellino said.
But debt loads are worrisome when they climb. And in a sobering commentary, Battellino said there was absolutely "no precedent" in Australian history for the constant – and essentially vertical – growth in debt over the past four decades. In the mid-1960s, credit was only equal to about 25% of Australia's gross domestic product. Today, that exceeds 150%.
News and Related Story Links:
- The Age.com News:
High Debt Leaves Households Exposed: RBA.
- Speech by Australian Reserve Bank Deputy Governor Ric Battellino:
- Money Morning News: