Us Mortgage Crisis Unlikely To Do Damage Here, Says Reserve Bank Governor

The Age

Saturday January 19, 2008

Tim Colebatch and Vanessa Burrow

AS AUSTRALIA'S sharemarket plunged for a record 10th consecutive day, writing billions of dollars off share values, Reserve Bank governor Glenn Stevens told Australians the US mortgage crisis was unlikely to do significant economic damage here.

The market followed Wall Street down, despite sharp differences between conditions in the two countries. The benchmark S&P/ASX 200 Index fell by almost 50 points, or 0.85%.

The two-week fall has taken $130 billion off the value of the top 200 companies in Australia. BHP Billiton, Wesfarmers, AMP, Foster's Group and Telstra have been the hardest hit in the 8.6% fall.

In the worst start to a year since 1982, Australians' share wealth is now back to where it was a year ago. But in London overnight, Mr Stevens argued that the economic fallout from the US crisis would largely bypass Australia and its key export markets in Asia.

While cautioning that it was too early to be sure how the crisis would carry outside the US, Mr Stevens said its direct financial effect on Australia was likely to be confined to relatively small rises in the borrowing costs of the banks, now passed on to their home-mortgage customers.

"Taking into account the strength of demand, this increase in borrowing costs does not seem likely to pose a particular problem for the economy as a whole," he said.

"There is no evidence, moreover, of a credit crunch in the domestic financial sector." While there could be a wider impact on Australia if the crisis sharply reduced growth in China or dampened Australian business confidence, he said "in both cases there is, thus far, no evidence of any significant impact".

Mr Stevens highlighted the fact that Asian and Australian investors had put little money into the US sub-prime mortgage market. The main effect on Asia's growth was therefore likely to come from slowing exports to the US, which he said would be manageable and not entirely unwelcomed.

While growth in the US and Europe could be much lower this year than in the recent past, Mr Stevens predicted that the world would have an average year, after a run of above-average years.