Crunch time could last two years

Danny John
Sydney Morning Herald
June 27, 2008

THE fallout from the global credit crisis which has pushed up borrowing costs in Australia to growth-sapping levels could last for another two years, the head of the country's largest bank said yesterday.

In one of the gloomiest verdicts on the crisis to date, the chief executive of the Commonwealth Bank, Ralph Norris, said the effects of the liquidity crunch would be felt for at least a year to come and could well play out into the middle of 2010.

Speaking at a Mastercard conference in Sydney, Mr Norris said general market conditions had improved since the US Federal Reserve bailed out the investment bank Bear Stearns in March but the drying up of global credit was still hurting economies around the world.

And he echoed the comments made last week by his ANZ counterpart, Michael Smith, who saw no immediate end to the lending downturn.

"It's a situation that is obviously very fragile. From my perspective, I would suspect that it's going to take at least another 12 months, possibly two years … for this particular crisis to work its way through."

The comments came as three local rivals to the Commonwealth - St George, the Bank of Queensland and Bendigo and Adelaide Bank - supported its view at a UBS banking industry conference that overall lending growth was tailing off.

The crippling of international credit markets emerged almost a year ago with the US subprime home loan disaster.

As the property market slumped, high-risk debtors defaulted on loans and interest rates began their ascent.

Higher bank borrowing costs have translated into steeper Australian home loan rates, which now stand 40 basis points above the increase of 100 basis points - a full percentage point - in the official cash rate imposed by the Reserve Bank since November.

Coinciding with a huge rise in fuel prices, this has curtailed consumer spending, and with business borrowing also slowing in the face of higher interest charges, growth in the domestic economy has begun to erode.

Mr Norris said there was no doubt this was happening, but he was more positive about the local economy than the US one, which some commentators say has tipped into recession.

While St George, the Bank of Queensland and Bendigo and Adelaide Bank indicated overall lending growth was slowing, they also suggested they were weathering the uncertain conditions as businesses and households cut back on their demand for new credit.

A drop-off in total home lending is being countered by the banks' ability to grow market share. A "flight to quality" is continuing to see people pile their money into the banks' coffers for safekeeping.

The one area that is particularly tracking lower for banks is the credit card market. That has taken a hit as consumers reduce their spending on discretionary and luxury items, normally the first things to go when households tighten their budgets.

The yearly increase in credit card balances has slowed to 10 per cent, its lowest level of growth since 1994, which the Commonwealth said was a reflection of a lowering of confidence rather than problems faced by consumers in paying back their loans.

This story was found at: http://business.smh.com.au/crunch-time-could-last-two-years-20080626-2xj3.html#