Skol a debt collapse is a slow collapse. It does not happen overnight look at a family in a similar situation it is essentially the same.
They are deep in debt, one partner loses a job, savings decline but a part time position may be secured. The old income is not replaced. The car runs a little behind in services, discretionary spending slows and bills start to fall behind. Eventually the credit card gets maxed out. Things slowly turn worse over many months, a loan from mum and dad follows. Finally the mortgage slips and they do a deal with the bank to string it out.
Every thing possible is tried. Eventually the car gets sold to get rid of that loan, a cheap second hand one replaces it with no loan overhead. A second part time job maybe, loans from friends and they start to sell off a few items. Eventually the bank has to be ignored, mortgage payments stop in favor of food on the table and keeping that car going to get to work.
Finally the bank forecloses. They do not wish to do this because the mortgage was a 10% risk weighted asset, so the bank hesitates for months, many months especially when conditions are like this. Declaring their debt a non-performing loan means this changes to a 100% risk weighted asset. The $300k mortgage required a $30k reserve coverage (at 10%) and this then changes to $300k at 100%. That is 10 loans worth of coverage in their reserve position against the property book, 10 business tractions (mortgages) that could have been covered. Do you wonder why the bank lets the payments get so far behind?
It trashes their lending capacity and this trashes their earning capacity. The family described above can be stripped of their assets and this is happening already in greater numbers as this global crisis hits Australia. A nation cannot be forced into administration like a business, or into bankruptcy like an individual. Nations have to be debt restructured and the bond holders take a hit.
Our banks face dire headwinds on many fronts. Forget about contagion starting, its over even Germany is lost - Europe is in slow collapse. Contagion is already done - its here. Capital flows out of Spain running at Euro300B a month currently. The ECB has to put that back in - its a reverse pooled debt scheme. Now they are all on fire. Only hope, smoke and mirrors stop this invading the psyche of all investors. Capital flees to the USA, even Australia.
Back home - here again the banks wholesale book has lost support from the European banks, and the UK, Scotland etc. Asian banks only here for Asians transactions - buying hotels up cheap and other distressed asset purchases. The banks are going home to Europe as their balance sheets shrink. The world is de-leveraging have you not come to grips with this yet?
The syndicated loan books will not be supported either. Our banks are on notice already. European banks not going to participate on maturity / roll over, they are selling up and closing offices in Asia and Australia as I write, but slowly as they edge for the exits. This will affect project funding and shrink some of our major companies. We have started the unemployment phase already.
The local property loan book is going backwards. Our GDP is almost completely debt funded. Forget about GDP to debt look at debt per capita. For Australia this looks much worse. The RBA has a terrible record of managing the OCR, it is way too high currently and attracting more hot money in a massive carry trade. The RBA made the same mistake in 2007 and 2008. Rates still going up in Feb and Mar 2008 LOL. They work on lagging indicators and focus on a narrow view seemingly dominated by inflation - in a deflationary world.
China shrinking, resource projects getting shelved. Smell the roses Skol. Things are not as they seem if you dare to look. Got gold? Got silver? Are you prepared?
