Australia’s experience in the subprime crisis

1

Australia’s experience in the subprime crisis

John EdwardsChief Adviser -Financial Markets, Macroeconomic Group

The Treasury

International credit spreads - correlations

-0.6

-0.2

0.2

0.6

1

1.4

Oct-05 May-06 Dec-06 Jul-07 Feb-08

-0.6

-0.2

0.2

0.6

1

1.4correlation correlation

Australian spread to UK spread

Australian spread to US spread

0

40

80

120

160

200

Oct-05 May-06 Dec-06 Jul-07 Feb-08

0

40

80

120

160

200basis points

Australian 3M LIBOR to OIS

spread

UK 3M LIBOR to OIS spread

US 3M LIBOR to OIS spread

basis points

Source: Reuters

The Treasury

Spread to risk-free rate: Australian corporations

0

50

100

150

200

250

30-Apr-07 20-Jul-07 11-Oct-07 2-Jan-08 25-Mar-08

0

50

100

150

200

250

Spread: 1-5 year AAA corporates over government

securities of comparable maturity (RHS)

Spread: 5 year AA rated CDS over government securities of

comparable maturity (LHS)

basis pointsbasis points

Source: Reserve Bank of Australia

The Treasury

International stock indices - correlations

Source: Reuters.

-1

-0.5

0

0.5

1

1.5

Dec-93 Dec-99 Dec-05

-1

-0.5

0

0.5

1

1.5

Full sample correlation

48-month rolling

correlation

All Ordinaries - Dow Jones correlation

-1

-0.5

0

0.5

1

1.5


-1

-0.5

0

0.5

1

1.5


48-month rolling

correlation

All Ordinaries - UK FTSE correlation

-1

-0.5

0

0.5

1

1.5


-1

-0.5

0

0.5

1

1.5


48-month rolling

correlation

All Ordinaries - Nikkei correlation

The Treasury

Securitised mortgages

-50

0

50

100

Dec-90 May-94 Oct-97 Mar-01 Aug-04 Jan-08

-50

0

50

100per cent per cent

Securitised housing loans: growth (tty)

All housing loans: growth (tty)

0

10

20

30

Dec-90 May-94 Oct-97 Mar-01 Aug-04 Jan-08

0

10

20

30

Securitised housing loans as a

proportion of all housing loans

per centper cent


The Treasury

Australian banks’ offshore borrowing

0

400

800

1200

1600

2000

Dec-89 Apr-94 Aug-98 Dec-02 Apr-07

0

400

800

1200

1600

2000

Banks' total offshore liabilities

Banks' total domestic liabilities

$ billion $ billion

-40

0

40

80

120

160

Dec-89 Apr-94 Aug-98 Dec-02 Apr-07

-40

0

40

80

120

160per cent per cent

Growth in banks' total

offshore liabilities (tty)

Growth in banks' total domestic

liabilities (tty)

Growth in banks' total

non-$A denominated liabilities (tty)


The Treasury

RBA balance sheet

0

2000

4000

6000

8000

Jan-03 Apr-04 Jul-05 Oct-06 Jan-08

0

2000

4000

6000

8000$ million$ million

ESA balances (end of day)

-2000

-1000

0

1000

2000

3000

-2000

-1000

0

1000

2000


Repo component: General collateral

0

1000

2000

3000

4000

5000

15-Mar-04 08-Jun-05 01-Sep-06 25-Nov-07

0

1000

2000

3000

4000


Repo component: ADI-issued securities

0

100

200

300

400

500

15-Mar-04 08-Jun-05 01-Sep-06 25-Nov-07

0

100

200

300

400


Repo component: Asset-backed securities


The Treasury

Banks’ liabilities: deposits

50

55

60

65

Jan-01 Oct-02 Jul-04 Apr-06 Jan-08

50

55

60

65

Deposits as a share of banks' total liabilities

per centper cent

Source: DX

The Treasury

Australian banks’ offshore bond issuance($A equivalent, quarterly)

0

10

20

30

40

2000 2001 2003 2004 2006 2007

0

10

20

30

40

OtherGBPEURUSDAUD

$ billion$ billion


The Treasury

Term funding costs

Source: Reuters

500

600

700

800

900

1 m

on

th

2 m

on

ths

3 m

on

ths

4 m

on

ths

5 m

on

ths

6 m

on

ths

1 y

ea

r

2 y

ea

rs

3 y

ea

rs

4 y

ea

rs

5 y

ea

rs

6 y

ea

rs

10

ye

ars

500

600

700

800

900basis pointsbasis points

14 December 2007

11 March 2008

14 May 2008

The Treasury

Credit market spreads - Australia

Source: Reuters

0

20

40

60

80

100

Jan-07 Mar-07 Jun-07 Aug-07 Nov-07 Jan-08 Apr-08

0

20

40

60

80

100basis pointsbasis points

90-day bank bill to OIS spread

5 Sept 07 to

12 Sept 07

10 Dec 07to

17 Dec 07

18 Feb 08to

12 Mar 08

5-7 September 2007:

•RBA injects $A 2.8b into financial system to provide liquidity.

•ECB lends emergency cash to banks (42.2b euros).

10-17 December 2007:

•Tighter credit conditions constrain several buyouts and acquisitions.

•Centro property group warns that it is facing trouble re-financing $A 1.3b of debt, due to the subprime crisis.

18 February – 12 March 2008:

•ANZ reveals that its earnings are likely to be hurt from the fallout of the credit crisis.

•Allco Finance Group Ltd. announces it will sell $A 2.1b of assets, after running into funding difficulties.

•MFS Ltd.’s largest fund suspends interest payments, and seeks funding support.

The Treasury

Internationalisation of Australian business

20

30

40

50

60

Jun-88 Dec-94 Jun-01 Dec-07

20

30

40

50

60per cent

Total trade to GDP

per cent


The Treasury

Australia’s external position

0

2

4

6

8

Jun-88 Dec-94 Jun-01 Dec-07

0

100

200

300

400per cent of nominal GDP

Net foreign

liabilities (RHS)

Net income and current transfers

deficit (LHS)

Current account deficit (LHS)


0

15000

30000

45000

60000

1959 1975 1991 2007

0

15000

30000

45000

60000

Australian investment abroad

Foreign investment in Australia

$ million $ million

The Treasury

Household debt to disposable income

Source: Reserve Bank of Australia and Bloomberg

0

60

120

180

Mar-77 Oct-84 May-92 Dec-99 Jul-07

0

60

120

180

Australian household's total

debt

Australian household's

housing debt

per cent per cent

0

60

120

180

Mar-77 Oct-84 May-92 Dec-99 Jul-07

0

60

120

180

UK household's total debt

US household's housing debt

US household's total debt

per centper cent

The Treasury

Household debt and house price growth

-10

0

10

20

Dec-97 Nov-99 Oct-01 Sep-03 Aug-05 Jul-07

-10

0

10

20

House price growth (tty)

Growth in household debt to disposable income (tty)

per cent per cent


The Treasury

Credit growth

0

100

200

300

400

500

Jan-90 Jan-96 Jan-02 Jan-08

0

100

200

300

400

500$ billion$ billion

Public sector

securities

Commercial lending - financial

intermediaries

Commercial lending - non-financial sector

0

100

200

300

400

500

Jan-90 Jan-96 Jan-02 Jan-08

0

100

200

300

400

500$ billion$ billion

Owner-occupied housing

Investor housing

Other "personal" lending


The Treasury

House prices to income

-10

0

10

20

30

Sep-76 Apr-84 Nov-91 Jun-99 Jan-07

-10

0

10

20

30per cent

Total household income growth

(tty)

Average house price growth (tty)

per cent

0

250

500

750

1000

Sep-76 Apr-84 Nov-91 Jun-99 Jan-07

0

250

500

750

1000index: September 1976 = 100

Total household

incomeAverage

house price


The Treasury

Business borrowing

-20

0

20

40

Aug-77 Mar-85 Oct-92 May-00 Dec-07

-20

0

20

40per cent

Business borrowing growth (tty)

per cent

0

2

4

6

Feb-06 Aug-06 Feb-07 Aug-07 Feb-08

0

10

20

30

Business borrowing

growth (mom) (LHS)

Business borrowing growth (tty)

(RHS)

per centper cent


The Treasury

Household saving, consumption and debt

-8

-4

0

4

8

Sep-59 Sep-71 Sep-83 Sep-95 Sep-07

-8

-4

0

4

8

Household saving

$ billion$ billion

0

3

5

8

10

Dec-92 Sep-96 Jun-00 Mar-04 Dec-07

0

200

400

600

800

Cash rate (end of quarter)

(RHS)

Household consumption (growth, tty)

(LHS)

basis pointsper cent


The Treasury

Employment, income and wealth

-3

2

7

12

17

Mar-89 Dec-92 Sep-96 Jun-00 Mar-04 Dec-07

0

4

8

12

16

Compensation of employees (growth, tty)

(LHS)

Assets of households and unincorporated

enterprises (growth, tty)

(RHS)

per centper cent

3

6

9

12

15

Feb-78 Feb-84 Feb-90 Feb-96 Feb-02 Feb-08

3

6

9

12

15million

Employed persons (LHS)

per cent

Unemployment rate (RHS)


The Treasury

Residential loan defaults: Australia vs. USA

0

500

1000

1500

2000

2500

Jan-01 Feb-03 Mar-05 Apr-07

0

500

1000

1500

2000


Subprime loan defaults

Prime loan defaults

0

10

20

30


0

10

20

30

Sub-prime loan defaults (% of securitised subprime loan balance)

Prime loan defaults(% of securitised prime

loan balance)

per centper cent

Source: Standard and Poor’s

0

10

20

30


0

10

20

30

Subprime loan defaults (% of subprime loan balance)

Prime loan defaults (% of prime loan balance)

per cent per centUSA

AustraliaAustralia

The Treasury

International banks’ return on equity

0

10

20

30

2002 2003 2004 2005 2006 2007

0

10

20

30

Australia US UK

per cent per cent

Source: International Monetary Fund

The Treasury

International banks’ provisions to non-performing loans

0

50

100

150

200

250

2002 2003 2004 2005 2006 2007

0

50

100

150

200

250

Australia Japan US UK

per cent per cent


The Treasury

International banks’ capital to assets

0

4

8

12

2002 2003 2004 2005 2006 2007

0

4

8

12

Australia* Japan* US UK

per cent per cent

*Tier 1 capital


The Treasury

Australian dollar volatility

0

0.01

0.02

0.03

0.04

Jan-00 Aug-01 Mar-03 Oct-04 May-06 Dec-07

0

0.2

0.4

0.6

0.8

1Volatility

$US per $A Volatility (LHS)

$US per $A

$US per $A (RHS)

Source: Reuters

The Treasury

Indicators of confidence in the economy

0

5

10

15

20

Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08

0

40

80

120

160

Westpac-Melbourne institute index of consumer sentiment (RHS)

NAB business confidence index - net balance

(LHS)

index index


The Treasury

Equity price movements

-40

-20

0

20

40

-40

-20

0

20

40

% change since 1 Jan 2007 % change since 1 Jan 2008

All Ordinaries

Dow Jones

NASDAQ

S&P 500

UK FTSE Euro Stoxx

Nikkei

Hang Seng

per centper cent

60

80

100

120

140

160

180

Jan-05 Jul-06 Jan-08

60

80

100

120

140

160

180index: 1 Jan 2007 = 100

All Ordinaries

NASDAQ

S&P 500

Dow Jones

60

80

100

120

140

160

180

Jan-05 Jul-06 Jan-08

60

80

100

120

140

160

180index: 1 Jan 2007 = 100

UK FTSE

Hang Seng

Nikkei

Euro Stoxx

Source: Reuters

Australia’s experience in the subprime crisis

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