Australia is “most likely to suffer a debt crisis” in the next three years. This has been disclosed in a study by Forbes magazine, which also listed China, Sweden, Hong Kong, South Korea, Canada and Norway as other economies facing such a risk.
In making the list, Forbes delved into the data on private and public debt of various economies, prepared by Switzerland-based Bank of International Settlements, reports The Sydney Morning Herald.
Endorsing the Forbes findings was Steve Keen, former Economics Professor at the University of Western Sydney. He said the pace of private debt growth in Australia seemed to be reflecting the scenario in the US, immediately before the 2007-08 global financial crisis.
Referring to the unbridled boom in Australian private sector, he said the pace would be unsustainable as prospective homebuyers “baulk at entry costs to house purchases”, and the credit demand is looking to plunge, signalling a prelude to recession.
In his view, Australia’s love affair with the property sector is sowing the seeds of a debt crisis, a report in the Herald Sun noted.
Noting that a two-year property price boom has fattened the pockets of thousands of vendors, the economist said, the same also became a hazard for many potential buyers by forcing them to dig deeper for a dream home. The struggle has been accentuated by the slow wage growth and a patchy economy, he added.
Forbes assessed the relation between credit growth and gross domestic product (GDP) with special emphasis on the phase when credit growth began to fall in the economies it listed.
“The bottom line is that private sector expenditure in an economy can be measured as the sum of GDP plus the change in credit, and crises occur when (a) the ratio of private debt to GDP is large; (b) growing quickly compared to GDP,” the magazine said.
In that respect, Australia has many vulnerable points such as a high-level private debt to GDP and a widening gap.
Australia’s debt exceeded 1.5 times GDP and grew 20 percent over a five-year period, Forbes said.
It may be recalled that Australia was able to tide over the 2007-08 global financial crisis with its booming mining sector and then Prime Minister Kevin Rudd’s largesse in pumping $900 billion as the stimulus to the economy.