In our previous article, Is Australia facing economic crunch time soon?, we said that,
…, Australia?s frightening high levels of debt makes her highly vulnerable to rising interest rates. Already, as we can see from the political election campaigns in Australian, a frequent theme is often being heard: working families are struggling due to price inflation and debt. Already, there are news reports of soaring bad debts among finance firms. At the fringes, we are seeing signs of the Australian economy under stress (see Investors beware! Signs of economy under stress).
As of right now, with a Federal election underway in a couple of weeks time, reports of housing un-affordability, rental crisis, mortgage stress and escalating living costs receive plenty of high profile coverage in the media (for example, see Interest rates push credit defaults skyward). But what is often neglected is the level of financial stress among Australia’s companies. As this news report, Rates, petrol put 10pc of firms at risk of collapse, says,
AS interest rates continue to rise, petrol prices hit records and the credit crunch worsens, almost 10 per cent of Australian companies – including 100 listed entities – face financial distress or insolvency next year.
According to Dun & Bradstreet, a leading receivables management and credit report company, there is a rising trend of Australian businesses under financial distress since 2005. This is happening in the middle of a period of widely perceived economic boom. As the article continued,
Industries most susceptible to insolvency included transport, communications and utilities, with 8.8 per cent of companies in these sectors in the top-risk category. Agriculture, mining [see our article, Can Australia?s mining boom turn into bust?] and construction followed closely at 8.5 per cent, 8.3 per cent and 8.1 per cent respectively.
As the Reserve Bank of Australia (RBA) had forecasted on their recent statement on monetary policy, inflation rates will exceed the 3% target limit in 2008. Therefore, interest rates will be on the way up again. Given the rising trend of financial stress among businesses and rising interest rates (see Interest rate rise in Australia- be prepared for more to come), what do you think this will do to the solvency of many Australian companies, especially the small businesses? If these businesses become insolvent, what do you think will happen to the solvency of their employees who have mortgage debt? If mortgage debts turn bad en masse, what do you think will happen to the value of houses (see Spectre of deflation on how imputed valuation can affect the value of assets)?
Do not underestimate the destructive power of debt!
