Posts Tagged ‘debt’

Is China’s pump priming bad for the US?

Tuesday, November 11th, 2008

Yesterday, China announced a US$586 billion stimulus plan. That stimulus will be used mainly for infrastructure and social welfare. Some of this big money (US$29 billion) will come from government borrowing (see China’s Bond Sales to Increase on Stimulus Package (Update1)). It is not clear how much of that US$586 billion are new and additional spending on top of the existing pump priming already earmarked. Since this is just an announcement, the devil is still in the details.

The stock markets in Asia and Europe were ignited after the announcement. But the US stock markets did not share that enthusiasm. America does not have much to rejoice for. Why?

The reason is because China’s stimulus is hardly good news for America. To know why, you have to understand a couple of important differences between American and Chinese government spending:

  1. So far, most of the billions of dollars of American government spending go to bailouts. Every dollar that is spent on bailouts and rescues will be a dollar not be spent on rebuilding and maintaining the existing decaying and aging infrastructures in the nation. For China, apart from social welfare and tax benefits, the money will be spent on building new infrastructure.
  2. The US is already a colossally indebted nation (see How is the US going to repay its national debt?). They have to borrow or print even more big money for non-productive purposes. China, on the other hand, is the world’s largest creditor nation. They can easily finance all the big money with cash (figuratively). All these big monies are spent on more productive purposes (definitely more productive than bailouts and rescues).

So, since the Chinese government is flushed with ‘cash,’ where is the ‘cash’ going to come from? As we said before in Why did the foreigners bail out cash-starved financial institutions?,

China?s trillions of US dollars reserve is a form of savings that will be used to acquire their future needs for resources to power their economy in the long term.

Most of China’s US dollar reserve exists in the form of US Treasuries. Currently, the US Treasury bond market is the last bubble that is yet to burst. Along with that, with the collapsing commodity prices over the past few months, every Chinese US dollar reserve is worth even more (i.e. every US dollar that China has can buy more commodities then before).

The implications for the US are grim:

  1. The US government can forget about borrowing from China for their bailout and stimulus spending. They have to either borrow from their private sector (which is in no mood to lend because it is drowning in US$41 trillion of debt itself) or print money.
  2. China has to either sell down its hoard of US Treasuries or at least slow down its pace of accumulation considerably. With the US consumers choking on too much debt, the leakage of US dollars to China (through the Current Account Deficit) will dry up. This means the back flow of US dollars back to the US via Treasury bonds purchases will dry up too (see Awash with cash?what to do with it? on how this works). This means long-term interest rates in the US will have to rise. Since US mortgage rates are largely derived from long-term interest rates, this will mean trouble for US mortgage borrowers.
  3. Chinese liquidation of US Treasuries is bad news for the US dollar. In fact, without foreign central banks’ accumulation of US Treasuries, the US dollar would have collapsed long ago.

The question is, will China be able or willing to engineer an orderly liquidation of US Treasuries?

Will RBA’s cutting of interest rates help?

Sunday, October 26th, 2008

Recently, Associate Professor Steve Keen made the prediction that interest rates in Australia will be cut to zero by 2010. As this news article reported,

University of Western Sydney associate professor of economics and finance Steve Keen is radically bullish on interest rates, predicting a 2% cash rate by the end of 2009, dropping to 0% in 2010.

Dr Keen said the RBA would become more concerned about high household debt levels than inflation, as deep rate cuts in 2009 failed to stimulate the economy.

”The debt bubble is bursting and when it bursts, people stop spending and borrowing,” he said.

Investors should realise is this: if interest rates is ever cut to zero (i.e. Zero-Interest-Rate-Policy or ZIRP), it will not be good news for the economy. It will reflect the complete failure and impotence of monetary policy in regulating the ‘temperature’ of the economy. In other words, to arrive at ZIRP, it means that the economy is in a very serious trouble.

Japan fell into ZIRP in the 1990s. As we all know, the malaise in the Japanese economy lasted 16 to 17 years before a glimmer of hope was seen at around 2003. Today, due to the global credit crisis, they are falling back into the recessionary hole. With interest rates at 0.5%, they have no more room to cut further.

One thing that is different about the Japanese economy from the Australian/UK/US economies is that Japan had a relatively high savings rate. During their lost decade of the 1990s, the Japanese drew on their savings and retreated to their economic bunkers as their economy and asset prices contracted year after year.

In contrast, Australia/US/UK today have no savings and are heavily indebted.

If the RBA cut interest rates further, it will be in reaction and anticipation to Australians closing their wallets, cutting up their credit cards and shunning debt. As we explained before in Will Australia?s own pump-priming work?, all we need is for Australians to stop borrowing in order to induce a deflationary force of $250 billion. This deflationary force alone will wreck havoc to many Australian businesses, which in turn will wreck havoc to the employment market. Once mass unemployment appears, a lot of prime debt will become sub-prime debt. When debt becomes sub-prime, cutting interest rates to zero will not help.

Dangling pornography in front of a dead man will not induce him to open his dead eyes. Likewise, the RBA dangling free credit to banks (i.e. ZIRP) will no longer induce banks to lend because of the pervasive fear of bad debts. To understand this, we highly recommend that you read What makes monetary policy ?loose? or ?tight??.

Currently, Australians are voluntarily shunning debt (as shown by the rapidly decelerating rate of credit growth) as banks are still willing to lend money (although lending standards are tightening). When this voluntary action crosses over to involuntary, it will be the day when the deterioration will accelerate.

Government’s contradictory messages

Wednesday, October 22nd, 2008

Back in Can China save Australia?, we mentioned about SBS’s Insight program, Greed. As we read the transcript of that program, we cannot help but realise that while the government officials are busy trying to deal with this crisis, they are sending out contradictory messages as a side effect.

For example, take a read at this:

JENNY BROCKIE:  But what sort of possibilities are we talking about here? I mean unemployment going up to 10%, 20% in the event of this taking hold in Australia? What could happen?

LINDSAY TANNER:  Definitely not. None of us can see into the future and the international crisis is obviously so unprecedented that it’s very hard to make predictions, but the fundamentals in Australia are very strong. We’re better off than virtually anybody else in the world to deal with these problems and we remain optimistic that we will be able to ride through this buffeting in reasonable shape.

On one hand, Lindsay Tanner ruled out the possibility of Australia’s unemployment going north of 10%. Yet, on the other hand, he said that no one knows the future and make predictions. If you notice, by saying “Definitely not,” he is already making a prediction!

Incidentally, in Jobless rate may double as China slows, JPMorgan Australia’s chief economist Stephen Walters said that

“We now expect the jobless rate to more than double to 9% in late 2010, from the current 4.3%,” Mr Walters said. “Softer growth in one of Australia’s leading export destinations means Australia’s export volumes will be lower, as will be the terms of trade.

“That said, on our forecasts, there will be 1 million unemployed Australians by the second half of 2010.”

The current way of measuring the employment rate includes those who are under-employed (see Nearly 600,000 Australians under-employed). When the economy slows down, it is those kinds of jobs that will be shed first, especially jobs in businesses that depend on discretionary spending (e.g. retailing). Therefore, a figure of 1 million unemployed people is not so unthinkable after all.

The next contradictory message from the government is on spending:

JENNY BROCKIE:   OK, there are quite a few things in what you’ve said that I’d like to pick you up on because we live in very contradictory times at the moment. You’re saying we should be thinking about thrift. You’ve just released a $10.4 billion package and you’re telling people to go out and spend. I mean, should Siobhan keep spending, keep getting into debt? What’s the message the Government is sending at the moment?

We believe that the government’s $10 billion stimulus package is a misguided Keynesian policy that will not solve the problem.

Firstly, as we said before in Will Australia?s own pump-priming work?, it is far too little to combat the deflationary force.

Secondly, even if it is big enough to induce the masses to spend, it is the wrong medicine. If such policies are carried out to the extreme, the outcome will be hyperinflation (see Bernankeism and hyper-inflation). As we explained in Supplying never-ending drugs till stagflation,

Students of the Austrian School of economic thought will understand that indiscriminate ?printing? of money will worsen the plague of mal-investments and structural damage in the economy. Like drugs, the more you ?print? money, the less effective it will be in stimulating economic growth (see What causes economic booms and busts?). Eventually, it will come to a point that the economy will not respond positively anymore no matter how much money is being ?printed.?

Without the liquidation of mal-investments and restoration of the structural imbalances that is brought about by deflation, applying bigger and bigger stimulus packages will only function in similar ways to drugs- more and more for less and less effect. The reason why Keynesian reflationary pump-priming worked during the Great Depression was that it was applied after the cleansing effects of the deflation had done its work. But today, in reaction to the financial crisis, governments all over the world are doing so before the purge of fire. As a result, the much-needed economic correction that the economy had to have will not happen.

Can China save Australia?

Tuesday, October 21st, 2008

Today, we watched SBS’s Insight program, Greed. It is basically a small forum where audiences and experts mingle together and talk about the global financial crisis. Near the end, Peter Schiff said that Australia will be fine because China’s insatiable demand for commodities will intensify as the Chinese revert to consuming their own produce. This will intensify China’s demand for Australia’s commodities, which means that Australia will be in a very safe position.

Here, we disagree with Peter Schiff. Our reasoning goes like this:

  1. Yes, in the very long run, as we said before in Example of a secular trend- commodities and the upcoming rise of a potential superpower, China’s demand for commodities will continue to grow. But the question is what happens in the interim (i.e. the short to medium term). The worst case is a epic bust for the Chinese economy (see Can China really ?de-couple? from a US recession?). The best case is a slow-down. In between these two scenarios is a major Chinese economic correction. Furthermore, we believe that this slowdown could be within the designs of the Chinese government in order to achieve their long-term plans. We will talk more about it in the coming articles.
  2. Australia has a very highly leveraged economy (see Aussie household debt not as bad as it seems?). It is this high leverage that can be the undoing of Australia’s economy in the interim.

This is a subtle point that eludes many people, including the experts. Sure, the end point may be a paradise in the mountain peak. But it is a mistake to assume that the path to the mountain peak is an upward slopping straight line. The current high leverage of the Australian economy can pull us down to a deep valley of hell in the interim. The problem is, many will not survive through the valley and for those who survive, they will be transformed (and even scarred) by the experience.

Will Australia’s own pump-priming work?

Tuesday, October 14th, 2008

As you have heard in the news by now, Australia’s Prime Minister Kevin Rudd announced a AU$10 billion stimulus plan. This is partially reminiscent to the US stimulus plan sometime at the beginning of this year, when the US government sent free money to American taxpayers and called them tax rebates. Rudd’s plan includes money for families, retirees, homebuyers and jobs training and infrastructure projects.

Will all these work?

Before we answer this question, let us consider the relative scale of the problem. According to Professor Steve Keen, Australians’ increased debt last year added $250 billion in spending into the economy. Currently, Australia’s credit growth is decelerating very rapidly. Should credit growth stagnate (or worse still, contract), this $250 billion (or more) in spending will go up in smoke. Therefore, a $10 billion stimulus is actually very minuscule compared to the potential loss in spending by Australian consumers when they are stretched to their limit in taking in more debt. Since most of the Australian economy is made up of consumer spending, such a severe contraction will have a very acute repercussion for the Australian economy. Recent data suggests that Australia’s total private data to GDP ratio is standing still at 165%.

There is no way the government can take up the slack left by the Australian consumer without turning the budget surplus into a deficit that is ten times its size (i.e. turn $22 billion surplus into a $250 billion deficit). But to keep Australians spending as before, they will have to accrue even more debt. There’s no way this increase in debt relative to income can go on forever without turning the entire nation’s economy into a massive sub-prime economy. When that happens, the inevitable blow up in debt bubble will be far greater.

By now, you should appreciate the magnitude of what the government and RBA are fighting against when you consider the scale of the coming deflationary force.

Interviewing Steve Keen for the upcoming property forum debate

Thursday, September 25th, 2008

In Upcoming forum debate: ?Property 2009: Crash, Boom or Stagnate?!?, we announced that for the upcoming property debate on 15 October 2008, we will be “inviting the various high-profile experts to this debate.”

Today, we would like to announce that Associate Professor of Economics and Finance from the University of Western Sydney, Dr. Steve Keen, will be one of the special guests in this forum debate. For those who have yet to know about him, we have conducted a short interview with him:


What are you currently doing in your line of work?
Currently, I’m revising a paper on how money is endogenously created by the financial system for the journal Physica A- the journal of interdisciplinary physics, where the so called “econophysics” school has evolved.

Once that’s done, I will start work on my magnum opus “Finance and Economic Breakdown”, a book-length development of Hyman Minsky’s “financial instability hypothesis” which will be published by Edward Elgar Publishers.

So, can you share a bit about your life journey that brings you to what you are currently doing?
I began as a believer in conventional neoclassical economics while doing my undergraduate degree and then had my confidence in this theory shattered by exposure to Lancaster’s “theory of the second best” in my first year at Sydney University. This theory, which shows that a move closer to the neoclassical nirvana of competitive markets everywhere may actually reduce welfare, made me aware of the theory’s fragility and I then embarked on my own learning odessey to work out why.

In the process I started the Political Economy movement at Sydney University.

After my student days I worked as an overseas aid education officer, a computer programmer, computer journalist, conference organiser, and then finally was employed by one of the Accord bodies under the Hawke Government. The way the Accord was hijacked by conventional economists within Treasury and the bureaucracy in general convinced me that I had to return to academia and take this nonsense theory on on its home turf.

That led to the publication of Debunking Economics, which was commercially successful, and made me a prominent member of the non-orthodox fringe of the economics profession.

It has been noted that your viewpoints on economics are very much different from the mainstream economics. In a nutshell, can you explain how and why they are different?
I reject the equilibrium modelling that dominates conventional economic analysis, and since I did mathematics as an undergrad and postgrad student, I knew how to apply nonlinear dynamic modelling methods to economics–basically using Differential Equations and Systems Theory. I also use Hyman Minsky’s “Financial Instability Hypothesis” as my fundamental model, supplemented with lashings of Schumpeter and a unconventional reading of Marx.

What is your stand on the current state of Australia’s debt levels?
We have reached a level of excess that is historically unprecedented–literally twice the level (compared to GDP) that caused the Great Depression. I have zero confidence in our ability to avoid a serious downturn as the great de-leveraging begins.


We will have another special guest for this forum debate. We will reveal who he/she is next week. Keep in tune!

Property 2009: Crash, Boom or Stagnate?!

When ‘cash’ becomes confetti, inflation/deflation becomes irrelevant

Tuesday, September 23rd, 2008

The financial and economic events of this month is amazing and history will one day judge September 2008 as one of the major turning points.
Today, if you follow the inflation/deflation debate on the Internet forums, blogsphere, etc, you will find this issue to be a highly divisive, polarising and at times, rather emotional debate. No wonder it is a highly confusing time for investors and traders.

For investors, it will be a big mistake to take sides in this debate. You may have certain inclination towards one or the other side of the fence, but do not dig in and get permanently committed to an opinion/idea. From our observations, some people have become too religious and emotionally involved to one side of the debate. They have become so religious that whoever belongs to the other side is regarded as an infidel. Such loss of objectivity will cloud your judgement.

First, for our newer readers, please take a read at What is inflation and deflation? for our definitions of inflation or deflation. They are not the mainstream idea of price rise/falls.

So, will hyper-inflation or severe deflation be the endgame of this financial crisis?

We don’t know which one will be. But our guess is that it is probably the former. But that does not mean we are loyally committed to that position and bet our entire life and wealth on that. After all, life is more subtle than that either black or white. Because we cannot know with certainty what the future will hold until time has passed, it becomes a game of probability for the present.

Now, take a read at Understanding the big picture in the inflation-deflation debate,

So, the world?s fiat money system works under the ?mechanism? of credit. Because money has to be returned, it acts, in theory, as a check against abuse and rampant monetary inflation.

The fact that the global financial system is facing acute deflation threat shows that this credit-system ?mechanism? is working to protect the integrity of fiat money!

At the root of the deflation argument is the fact that we live in a credit-based economy. As long as this credit-based system is in place, any inflationary bubble will be ultimately deflationary. Please note that the word “ultimately” in the previous sentence is bold. The word, “ultimately,” is a very important qualifier. This implies that before the ‘ultimate’ deflation, we can have inflation in the interim.

So, to illustrate the point of this qualifier, let us conduct a thought experiment. For the purpose of argument, let’s assume that the credit mechanism is firmly in place.

Say, the US nationalisation of its financial sector transfers most of these toxic private sector debt into the public debt. Given that the US government already has a huge amount of debt, this means they have to raise even more debt. The only way for the US government to issue more debt is to issue government bonds, which is still borrowed money that has to be returned. We can see why this is still ultimately deflationary because no matter how much the US government borrows, it has to return them eventually (e.g. by raising taxes).

Now, let?s take a step further and say that the US government monetises its debt by selling the newly issued government bonds to the Federal Reserve. That?s in effect printing of money. Even then, some will argue it is still ultimately deflationary because it is still credit i.e. the government has to eventually buy back the bond from Federal Reserve.

Let?s take a step even further. Let?s say the government pays off that expired monetised debt by monetising even more debt. That?s like an individual borrowing from one credit card to pay off another credit card. Imagine what will happen if the government do that! Its debt will grow exponentially, which is hyper-inflationary. Still, it can be argued that it is still ultimately deflationary because all these government debt has to be returned.

At this point, let’s pause and think.

In such hyper-inflationary environment, it’s doubtful whether people will see government legal tender ‘cash’ as money any more. In Zimbabwe, during an auction of a car, ‘cash’ no longer function as money. Instead, petrol vouchers (denominated in litres of petrol) were used as a unit of account for the bids. In Vietnam, the recent high inflation of the Vietnamese currency leads to some instances whereby people no longer uses legal tender ‘cash’ as money in buying/selling land.

The point we are trying to make is that by the time the situation becomes that bad, all talks about inflation or deflation is irrelevant because, ‘cash’ no longer function as money for practical purposes. They become as good as confetti. Who cares about the inflation or deflation in the supply of confetti?

Please note that the purpose of this article is not to make an inflation/deflation forecasts in the prediction sense. Its purpose is to show you how dragging an idea to the extreme can lead to erroneous thinking. In this example, while it is true that deflation will ultimately happen theoretically in the context of a credit-based system, it is pragmatically irrelevant.

Upcoming forum debate: “Property 2009: Crash, Boom or Stagnate?!”

Monday, September 8th, 2008

Note: This is an announcement for an event that we are co-hosting with OurFinanceBlogs:

Property has been a popular route to wealth for many Australians for many years. Buying their own home is often the first investment many people make; purchasing another property may well be the second even before shares and other assets.

It has been said that property prices can be less volatile than share prices though not always and it tends to be regarded as a safe haven when other assets are declining in value. Property has the potential to generate capital growth as well as rental income. In addition, there are the tax advantages associated with negative gearing and capital tax concessions.

No wonder property investing is one of the favourite mainstays of investments for Australians.

But there is the dark side of property as well. Over the past 10 years, property prices have been surging faster than the rise in wages. Consequently, the level of debt that comes with this phenomenon has increased significantly for Australians, putting many of them in serious debt situations. As a result, the Australian dream of home ownership has become an elusive hope as housing becomes more and more unaffordable, along with soaring rents.

Without a doubt, this issue is polarising Australia, as there is an increasing perception that some in the community are benefiting from property at the expense of others. Whether this perception is justified or not, it is a making property more and more into a vested emotional issue for the Australian community. Consequently, with the Australian economy at the turning point after 17 years of uninterrupted growth and the global financial system rocked by a credit crisis, we are seeing conflicting forecasts by various experts on the future of Australian property prices.

So, what is the future for Australian property prices?

It is in such a time that clear thinking is urgently required. And so, on the 15th of October 2008, we are inviting members of the Australian online community to a debate on property at ?Property 2009: Crash, Boom or Stagnate?!? We will be inviting the various high-profile experts to this debate. Stay tuned as we reveal who they are!

Property 2009: Crash, Boom or Stagnate?!

Do property price always go up?

Monday, August 25th, 2008

One of the most entrenched superstitions is that property is a safe and secure asset class that always go up in price over time. It has come to a point that some people believe that property prices never come down. Some people will even cite the trend of the past 10 years to prove the point of this superstition.

But as Nassim Nicholas Taleb said in his book, The Black Swan: The Impact of the Highly Improbable, all you need to prove that not all swans are white is to find a black swan. In the same vein, all we need to prove this superstition false is to come up with examples of the opposite happening. The fact is, history is on our side- with the bursting of the Japanese bubble economy of the 1990s, property prices in Tokyo was said to have collapsed by 70% over the course of the decade. As of today, median house prices in the US has fallen around the order of 15% in one year.

For today’s article, we will draw out another big gun to blast away this superstition. At the beginning of the year, the ABC had a documentary about 350 years of Dutch experience- Dutch history pointing to real estate fall. In that documentary, it reported

The house sugar merchant Cornelis Sasbout built in 1617 at number 150 on Amsterdam’s Herengracht canal tells a cautionary tale about investing in property – prices fluctuate wildly, but are ultimately flat.

In that documentary, when it said “flat” prices, it means “flat” in real terms.

Mind you, the Herengracht is not some piece of forsaken real estate built in the middle of nowhere. It is a prime real estate for over 350 years, as this documentary reported:

Eichholtz says what makes his index stand out from house price histories in other cities is what he calls “constant quality” – the Herengracht has always been prime real estate. The index corrects for rising consumer prices but not wages.

What is the lesson here for Australia? Well, Australia is still sitting on an unprecedented debt bubble. For those who still need convincing, please take a look at Professor Steve Keen’s scary debt charts at Debtwatch No. 25: How much worse can ?It? get? and our commentary at Aussie household debt not as bad as it seems?. When the debt bubble burst eventually, we can be sure the frequently parroted justifications of this superstition (e.g. housing ‘shortage,’ immigration, etc.) will be revealed as hogwash. We would love to see those ‘experts’ who wrote reports that justify this superstition be paraded as clowns when they are proved wrong in due time (see Another faulty analysis: BIS Shrapnel on house prices).

How safe are Australian banks?

Wednesday, July 23rd, 2008

There are widespread beliefs that the Australian banking system is safer and more conservative than their overseas counterparts. Thus, it is generally assumed that the sub-prime and credit crunch problems that affected the US will not happen in Australia. But is this a reasonable assumption?

First, as we showed in Australia has no sub-prime debt? Think again!, there are real-life examples of dodgy lending by Australian banks. The question is, how widespread is such lending? Are these examples of dodgy lending indications of a systemic problem? In any case, it is obvious that it is not in the banks’ best interest to be forthright about their dubious lending practices. Perhaps you may want to do your own scuttlebutt research on this. If you have any stories about dodgy lending practices or dodgy borrowing, please feel free to share them in the comments section below.

Next, our suspicion is that Australian banks are severely underestimating their vulnerability. As Brian Johnson, a banking analyst from JP Morgan was quoted in Banks to feel more pain: analysts,

Mr Johnson believes that Australia’s banks are failing to envisage the possibility of a loan-loss cycle where asset prices [such as housing] fall, and banks struggle to recover loans from defaulters and forced sales.

Mr Johnson said Australian banks are actually more vulnerable to the credit crunch than many of their global counterparts because of their high levels of gearing, or loan to capital ratios.

We’re talking banks geared 25-30 times, whereas the global peers may be geared 15-20 times… even a moderate loan-loss cycle creates negative earnings,” he said.

As we said before in Aussie household debt not as bad as it seems?,

A severe downturn to the Australian economy may or may not be statistically likely, but given the level of unprecedented leverage, you can be sure the impact will not be small. Be sure to understand the concept of Black Swans (see Failure to understand Black Swan leads to fallacious thinking).

In addition, the Australian banking system has a vulnerability not shared with other countries. As this news article, Fast rise of round robin lenders, reported,

The Reserve Bank of Australia has a dark worry about our banks: they get 90 per cent of their cash from each other. If one bank gets into trouble, the Australian financial system could be snap-frozen overnight.

We will give a highly simplified analogy of this problem. Imagine an economy of 3 people: Tom, Dick and Harry. Tom owes Dick $1000, Dick owes Harry $1000 and Harry owes Tom $1000. Each of them will have a balance sheet that looks something like this:

Asset: $1000
Liabilities: $1000

For each one of them, what they owe are their liabilities and what they are owed are their assets. Let’s say, for whatever reasons, Tom is unable to honour his debt repayment to Dick. In that case, Dick’s asset will go bad. As a result, he is unable to honour his debt repayment to Harry. This in turn caused Harry’s asset to go bad, which affected his ability to repay his debts to Tom. Therefore, one person’s debt problem becomes a contagion that spreads to everyone else.

In a similar way, this is the current vulnerability of the Australian banking system. It is unique to Australia because of the shortage of government debt that could be used as bank assets and collaterals, thanks to the previous government’s budget surplus. We suggest that you read our earlier article, Banking for dummies for more details about bank balance sheets.

Of course, though it may be possible that such things may happen, it does not necessarily mean that it will happen. It’s the job of the RBA and APRA to prepare the drills in anticipation of this worst case scenario. But should it happen, what can be the possible triggers? For the answer to this question, one news article, ANZ is the big local bank most at risk, caught our eye:

ANZ Bank has been singled out ahead of other big Australian banks as most at risk of further material provisions because of its long credit default swap positions, potentially running to $2.4 billion, based on international comparisons.

National Australia Bank is not far behind in the structured credit risk stakes.

As we highlighted before in How the CDS global financial time-bomb may explode?, Australia is not going to escape unscathed when this potential disaster strikes.

In view of all these, perhaps there is little wonder that, as Fast rise of round robin lenders reported,

At a recent conference held by one of the world’s largest banks, the Australian banking system was identified as one of the best investment opportunities, for going short.