Monday, 28 November 2011

Australian Banking Crisis

GFC II on its way: Norris 

OUTGOING Commonwealth Bank chief executive Ralph Norris has warned that the European debt crisis has entered a dangerous phase, likening the current turmoil to the global financial crisis of three years ago.

Mr Norris said global money markets ''effectively froze'' this week as Germany failed to sell the entire stock of €6 billion ($8.2 billion) worth of long-term bonds.

But Mr Norris, who retires next Wednesday after more than six years in the role, cautioned that credit-crunch conditions were returning, which is threatening to choke off funding for banks around the world.

''This has potential to be significantly worse than the Lehman Brothers collapse and the subprime crisis because now we are talking about nation states,'' Mr Norris told BusinessDay.

''If you have a situation like you had today, where markets had effectively frozen, then it doesn't matter how good your name is, you are not going to be able to access markets,'' Mr Norris said. ''As of today, no banks could access these markets.''

Westpac boss Gail Kelly also expressed fears about the fragile situation and urged Europe's regulators to get on top of the crisis.

''What's happening in Europe is a major concern and not improving. The various authorities in Europe actually have the capacity to deal with these issues - I certainly wish they'd get on with it and do it,'' she said.

If the Australian bankers make the wrong decisions, then we will have a credit squeeze and dangerous asset price fall. Or putting it another way, Australian bank chief executives are about to really earn their money and if they fail, they will be put on the scrapheap. 
If funds dry up in Europe, they will dry up elsewhere. And Australian banks rely on liquid funding markets overseas to run themselves.

If credit markets freeze overseas, so will bank lending in Australia. That means people won't be able to take out a loan to buy property. Demand for property will dry up. And property values will disappear. By that we mean that an asset without demand doesn't really have a price. It's like a pebble on the beach. Until someone wants to give you money for it, it's not worth anything.

Australians expecting a housing bubble to pop may have to adjust their narrative. The straw that breaks this camel's back may be falling on the other side of the world - in Europe's debt markets.

But it's not just home lending that could disappear. Personal loans usually freeze up first. All this means your business will not be able to get loans, your children won't be able to get a mortgage and your credit card will stop working. 

When the EFTPOS machine spits out 'insufficient funds', you won't know whether it means the bank can't afford to pay you or you don't have any money left in your account.

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