Australia’s economy in death-spiral binge on foreign debt and derivatives

Updated figures compiled by the Citizens Electoral Council show that Australia’s foreign debt has soared by $100 billion in three months, to $1.4 trillion, and the Commonwealth Bank is leading a banking binge on toxic derivatives speculation—clear signs that Australia is in the same danger zone as the GFC meltdown of September/October 2008 that required over a trillion dollars in government guarantees to save the banks.

Click here to see updated graphs of Australia’s Gross Foreign Debt, and Derivatives exposure of the big four banks.

Foreign debt

The majority of Australia’s foreign debt is owed by the banks, which hoover up the foreign investment pumped into Australia via the high interest-seeking “carry trade”, and on-lend into the domestic economy, usually as mortgages.

Following the GFC “credit crunch” scare of 2008, when the carry trade collapsed, there was an initial effort by the banks to pay down debt, which saw a fall in gross foreign debt, but that has since reversed, and foreign debt is rising at a rate last seen immediately before the September 2008 meltdown.

Even so, a rise of $100 billion in just one quarter, to an all-time record of $1.4 trillion, is unprecedented.

Don’t fall for the “spin” that says it is a good sign for the Australian economy that investors are willing to lend here (which is irrelevant, given the rest of the world is in the financial sewer)—Australia’s banking and financial system is addicted to foreign borrowing, to feed into the domestic “bubble” economy, especially the property bubble.

Bank derivatives

Despite the Lehman Brothers-AIG proof that derivatives are the toxic cancer that has destroyed the world economy, Australia’s big four banks have record exposure to derivatives (see graph).

Most notable is the Commonwealth Bank’s, which has gone from the lowest exposure of the banks up until 2008, to leapfrogging ANZ and Westpac to now have the second highest exposure.

Derivatives gambling is a way for banks to pretend they are making money that they’re not: for example, the collateralised debt obligations (CDOs) derivatives that melted down worldwide following the U.S. subprime mortgage crisis were mortgage-backed securities sold by banks to instantly recoup their mortgage loans, instead of waiting for those loans to mature. The banks were able to show large instant profits, while ignoring the reality that the loans they made were bad—those loans blew up later, burning CDO investors all over the world, including scores of Australian councils.

The CEC has long said that the Commonwealth bank is in bad shape, being the most exposed to the domestic property bubble, which is primed to blow, just as every other property bubble in the world already has.

Its extraordinary binge on derivatives is an alarming indication that it is desperately trying to dig itself out of a hole—a hole that doubtless includes the destruction it wreaked on investors—and itself—in the Storm Financial margin lending catastrophe.

The total derivatives exposure of all Australian banks has skyrocketed in three years from $14 trillion, when the GFC first struck in 2008, to $17.9 trillion today.

Citizens Electoral Council leader Craig Isherwood said today, “We’re three years into a global economic breakdown that is worse than the Great Depression, but Australia’s financial system to still binging on the very debt and derivatives gambling that caused the crisis.

“Just as it was only the CEC, along with Lyndon LaRouche, who warned what would happen before the financial blow-up, only the CEC and LaRouche have the solutions: a Glass-Steagall reorganisation, the Homeowners and Bank Protection Bill, the urgent need for a government-owned national bank, and a massive infrastructure development program for Australia to revive the economy by putting it on a real industrial footing again.”