That stock prices depend so much on the availability of cheap financing shows you how much of the economy has become ‘financialised’, that is, dependent on leverage for investment returns rather than organic business growth or capital investment. It also shows you why stocks are not in the clear yet from credit market troubles. This applies to Australia, too.
“The world financial crisis is choking the flow of foreign capital on which Australia’s banks have depended to finance their growth over the past decade,” writes David Uren in today’s Australian. He goes on to show that Australian banks are paying a higher price to borrow money in international markets. This leads to higher interest rates at home.
“The major Australian banks depend upon foreign markets for about 30 per cent of their funding, with smaller banks making less use of this source,” Uren writes. Does it seem odd to you that Australian banks are borrowing money from abroad to lend it at home? Why not just lend based on savings deposits from Australian depositors?
The answer there is that you might not get a huge boom in housing lending unless you can borrow capital from abroad and re-lend it at home (at slightly higher rates, of course). Australia, by the way, borrows as well as anyone in the world. The housing boom was built with foreign money. But the whole economy is built with borrowed money.
The chart below is taken from a speech given by Reserve Bank Deputy Governor Rick Battellino in late September. It shows two things. First, in the last twenty years credit growth in Australia is the third highest in the developed world. Second, credit has been growing, on average, 5 points faster than GDP. Seeing is believing:
Markets and Money