the australian dutch disease

These are excerpts from an article headed above. It isn't easy to download the whole piece

http://www.variantperception.com/australia-report

""> Australia is a classic case of the Dutch Disease. The Dutch Disease denotes the loss of competiveness in the tradable manufacturing and industrial sector as a result of a resource/commodity boom which leads to an overvalued real exchange rate. In Australia, the mining sector has crowded out almost all other sectors of the economy and also funnelled credit and liquidity into a housing bubble in the real estate sector.

> Australia net external debt levels resemble those seen in the European periphery; the currency is fundamentally vulnerable. Australia has been running a persistent current account deficit since 1980 and the country’s negative net international investment position is one of the largest in the world. On this background, the strong currency makes no sense and fundamentally the currency is very vulnerable to capital flight from the banking system.

> Australian banks and corporates rely heavily on foreign funding; the RBA will have to provide liquidity through LTROs. Structural global deleveraging and stop-go flows add volatility for Australian banks. As the housing market continues to correct, it may be difficult for Australian banks to fund themselves. Lowering interest rates will hurt the margins of the banks, and the RBA will likely be forced into domestic liquidity operations to prop up its banks.

> Two options to weaken the currency, lower rates or a balance of a payments crisis. The Australian currency will weaken in one or two ways. Either the RBA gradually reduces interest rates to accommodate a structurally slowing economy and a relative end to the mining boom or the economy will suffer from a balance of payment crisis as external financing dries up due to the decline in the terms of trade exposing the negative current account.

> Australia’s commodity sector is tied to a structurally slowing Chinese economy. The commodity sector remains a force to be reckoned with in Australia and will remain cyclically tied


UNWIND OF DUTCH DISEASE IN AUSTRALIA REQUIRES A SIGNIFICANTLY WEAKER CURRENCY
The Australian economy needs a substantially weaker currency to regain competitiveness outside the mining sector. As we detail below, this can happen either through the RBA reducing interest rates or through a balance of payment type crisis in which foreigners pull funding. In either case, the Australian dollar is set to weaken substantially.
Australia is likely to have built up significant overcapacity in mining relative to a global demand shock which, by definition, will not persist with the same intensity.

AUSTRALIA’S EXTERNAL FINANCES RESEMBLE A COUNTRY IN THE EUROPEAN PERIPHERY
The Australian banking system is highly reliant on external funding and will likely become dependent on the RBA for liquidity in the near future. Our view is that the RBA will have to become much more activist in supporting its major banks as the structural slowdown in China and the housing market continues.

We believe the RBA will ultimately be forced to take similar action to developed market central banks either by aggressively cutting interest rates or propping up banks through domestic open market operations akin to the liquidity injections seen by the ECB. Quantitative easing is also a possibility if the RBA is forced to buy bank debt to try to stave off a financial crisis. Under such a scenario, the AUD would fall considerably.

The crisis-stricken economies along the eurozone periphery share one key characteristic: their external debt is too high and their net international investment position (NIIP) - measuring the difference in stock value between assets held abroad and asset held domestically by foreigners - is deeply negative.

Yet, a closer look and you will find Australia and its neighbour New Zealand in the same company, with negative NIIP well above countries such as Turkey and Brazil.

AUSTRALIA IS LEVERED TO A SLOWING CHINESE ECONOMY
Australia will continue to be cyclically tied to China, but structurally the economy is likely to suffer from substantial overcapacity relative to a slowing Chinese economy. China’s structural growth rate is likely to fall significantly in the coming years and investment growth will wane. This is bearish for the Australian mining sector.