SYDNEY (Dow Jones) – Australia’s banking sector is vulnerable to the squeeze in global liquidity conditions and any negative swings in investor sentiment, Standard & Poor’s Ratings credit analyst for the country said Tuesday, illustrating the growing threat from Europe’s spiralling debt crisis.
Bank borrowing costs in Europe are pushing higher as investors worry the debt crisis there could result in a sovereign default. Those fears have rattled global credit markets and Australia’s banking system, which depends heavily on offshore borrowing, could suffer.
“Those economies with highly leveraged financial systems like in Australia are more exposed to tightening liquidity conditions globally,” Kyran Curry, S&P’s primary credit analyst for Australia told Dow Jones Newswires. His remarks came after the ratings firm said the outlook for Australia’s economy is at risk from the uncertain outlook in the U.S. and Europe.
“The (Australian) banks are highly leveraged and are exposed to shifts in investor sentiment and tightening liquidity conditions. While we are not seeing that now, the risk is there and it just won’t go away,” he said. Curry said Australia’s AAA rating is robust, but cautioned a traditionally large reliance on offshore borrowing by local banks remains a watch point. In recent months local lenders have largely stayed clear of wholesale markets as demand for credit wanes and higher households saving rates boost cash deposits.
If a new credit squeeze emerges on the scale of the 2008 funding crisis, Australia’s banks would feel the pinch.
“It’s an emerging risk. It’s always something we’ve viewed as being a soft underbelly for the Australia credit rating,” he said. “It’s something we are watching very closely in this market.”
Westpac Banking Corporation