Like what you've read?

On Line Opinion is the only Australian site where you get all sides of the story. We don't
charge, but we need your support. Here�s how you can help.

  • Advertise

    We have a monthly audience of 70,000 and advertising packages from $200 a month.

  • Volunteer

    We always need commissioning editors and sub-editors.

  • Contribute

    Got something to say? Submit an essay.


 The National Forum   Donate   Your Account   On Line Opinion   Forum   Blogs   Polling   About   
On Line Opinion logo ON LINE OPINION - Australia's e-journal of social and political debate

Subscribe!
Subscribe





On Line Opinion is a not-for-profit publication and relies on the generosity of its sponsors, editors and contributors. If you would like to help, contact us.
___________

Syndicate
RSS/XML


RSS 2.0

Bad feelings become self fulfilling

By Mark S. Lawson - posted Tuesday, 14 October 2008


In Australia, the anecdotal evidence is that banks are not recalling active loans, unless there are problems with repayments, but they are proving reluctant to make new loans or extend existing credit lines.

They may also prove more difficult about renewing loans, when businesses have to renegotiate credit lines which they usually do every three years. I recently saw an announcement for one developer that a major building project in Brisbane would not go ahead, due to finance. The money was still available, but with all sorts of conditions imposed by the bank involved - conditions which the developer thought it could not meet.

Incidents like that may be happening all over the developed world.

Advertisement

This reduction in business activity is revealing weaknesses that would have remained hidden for years - and is revealing them all at once. Recent efforts to restore liquidity to the banking system are, incidentally, aimed just as much at banks as at consumers. The idea is to get banks lending again.

In the meantime the markets have reacted to the looming recession with a blood bath which, in typical market fashion, may have gone too far. One underlying indicator of the value of Australian stocks are price earnings ratios. The average P/E ratio for the market at the height of the stock market boom late last year was 25 - that is, companies would take 25 years to return profits equivalent to its market price. That was probably too much. Typically something like 12 would be regarded as solid value and 18 would be over sold - depending on expected economic conditions. The market prices in expected reductions in profits, well before they happen and profits are expected to take a hit this year. Following a pick up in prices earlier this week, the average P/E ratio for Australian stocks was around 11.4.

At this stage anyone who tells you they know what is going to happen next is probably trying to sell you something. My guess (I emphasise the term “guess”) is that as our banking system does not seem to have been badly affected - our regulatory authorities may take a quick bow - the recession will not be very deep or long in Australia.

The sharp falls in resource prices is more of a worry for our long term future, but Australia was always much more than resources and the economy has been booming for some time. A period of consolidation may even help, although that will be small consolation for those who lose their jobs over what amounts to a crisis of confidence all brought on by a boom and bust in American house prices.

  1. Pages:
  2. 1
  3. Page 2
  4. All


Discuss in our Forums

See what other readers are saying about this article!

Click here to read & post comments.

6 posts so far.

Share this:
reddit this reddit thisbookmark with del.icio.us Del.icio.usdigg thisseed newsvineSeed NewsvineStumbleUpon StumbleUponsubmit to propellerkwoff it

About the Author

Mark Lawson is a senior journalist at the Australian Financial Review. He has written The Zen of Being Grumpy (Connor Court).

Other articles by this Author

All articles by Mark S. Lawson

Creative Commons LicenseThis work is licensed under a Creative Commons License.

Photo of Mark S. Lawson
Article Tools
Comment 6 comments
Print Printable version
Subscribe Subscribe
Email Email a friend
Advertisement

About Us Search Discuss Feedback Legals Privacy