Uncertainty in Europe could lead to Australian exporters feeling the effects. Europe continues to face economic uncertainty as peripheral countries such as Greece and Spain fall further into debt. Governments are facing public backlash at policies that have been cutting public spending. Severely raising taxes are also yielding no solutions to the continued debt, according to the World Risk Developments newsletter. The newsletter, released by the Australian Government’s export credit agency EFIC, outlines the possibility of Spain requesting an official bailout, and increased unemployment in the area leading to political discontentment. EFIC chief economist Roger Donnelly said that banks in the region continue to struggle, and that fiscal solvency is getting worse. "The troubled periphery of the area has been cutting public spending and raising tax rates - severely. And the European Central Bank has extended €1 trillion in cheap three-year loans to banks throughout the zone. Yet GDP continues to stagnate or slump," Donnelly said. "Banks continue to struggle; and public debt/GDP ratios in all the troubled peripheral countries continue to rise, showing fiscal solvency is getting worse, not better," he added. Donnelly said that unemployment throughout Europe has increased which is adding to political discontentment. "Unemployment throughout the euro area is now at 11 percent, and youth unemployment is around 50 percent in both Greece and Spain. Not surprisingly, voters are angry and casting around for new politicians with new solutions," Donnelly said. The newsletter also details other problems that Australian exporters are facing internationally such as the high dollar, and competing with cheap Asian imports. Commenting on the implications for Australian exporters Donnelly said, "Thankfully the direct trade shock from such a setback would be small overall, because Australia doesn't export much to the euro area. "It's the roundabout effects that are more worrisome. The euro area is China's number one export market and China is Australia's number one export market. So the lower euro area demand for Chinese exports could translate into lower Chinese demand for Australian commodities. Fortunately, China has some capacity to stimulate domestic demand in order to moderate a euro area export shock, and this should mute any impact on Chinese demand for Australian exports. "More serious effects could come through financial market channels. First, the availability of trade finance could deteriorate. Remember, European banks are reportedly responsible for 80 percent of trade finance worldwide. If they come under even greater pressure than they are currently to shrink their balance sheets, they will also restrict their extension of trade finance. Second, credit more generally could be squeezed. This is because Australian banks are heavily reliant on wholesale offshore funding markets, and any squeeze on these markets will increase the cost of funding, which the Australian banks will want to pass on to their customers, including their business customers. "If worse comes to worst, the euro area problems could cause another world financial crisis and recession. In that event, both Australia's commodity prices and the A$ would probably gap downwards significantly à la the aftermath of the Lehman’s bankruptcy in 2008. Australian exporters would face a lower dollar which is good but world trade would be shrinking which of course would have a negative impact."
PUBLISHED | MAY 23, 2012
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