Australia’s Future in the Face of a Debt Crisis

Financial Crisis in AustraliaAussies are in potential financial trouble for the next few years, at least according to a report from Forbes. Australia is listed among six other nations that are “likely to suffer a debt crisis” within the next three years. The magazine looks at the credit growth rate compared with the country’s GDP. Their focus is on when credit growth begins to fall.

The Current Situation

Australia showed a high level of private debt to GDP, as well as a rapid growth of the private debt-GDP ratio in the last few years. It seems to be quite noticeable even in the most basic sects of society. A leaked report says that the debt held by Aussie households before the GFC was so high, pointing to the possibility of a massive increase in defaults. In turn, lenders including RapidLoans.com.au take the spotlight when people are looking for an alternative.

A graph from the Bank of International Settlements paints a grimmer picture. It shows a massive disparity between private debt (owed by companies by households) and government as percent of the GDP. Private debt topped at a massive 200% and up, compared to government debt which comprises a good 25% of the GDP by the 1st quarter of 2015.

A Bit of Optimism

Capital Economics’ Paul Dales, the company’s chief Australia and New Zealand economist, maintains a positive outlook. He claims that while concerns exist (especially in the household sector); data suggests that the debt crisis risk is in fact receding.

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In terms of the Australian household debt to GDP ratio, the ratio itself looks higher than it really is. It’s because several homes have cash in offset accounts, and a lot of borrowers take advantage of the decrease in their mortgage payments which are due to low interest rates. In turn, they have the chance to add to their offset accounts. What this means is that people are paying down mortgages faster than required.

What matters most is that Aussies do their part when it comes to balancing the debt-GDP ratio. Any untoward fluctuation can mean bad things for the Australian economy.

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