European crisis could spark new credit crunch: Commonwealth Bank chief

Commonwealth Bank chairman Ralph Norris has warned that the sovereign debt dilemma in Europe has the potential to spark a second global financial crisis.

The chairman, who retires next Wednesday after six years at the head of the bank, made the statements in an interview with Fairfax outlets published this morning.

He said that credit crunch conditions were returning around the globe, and threatened to significantly raise the costs of wholesale funding for banks.

”This has potential to be significantly worse than the Lehman Brothers collapse and the subprime crisis because now we are talking about nation states,” Norris said.

He added that money markets around the world suffered a shock earlier this week when Germany failed to complete a long-term bond sale.

On Wednesday, Commonwealth Bank delayed its own covered bond sale in the face of increased borrowing costs.

”If you have a situation like you had today, where markets had effectively frozen, then it doesn’t matter how good your name is, you are not going to be able to access markets,” Norris says.

Research director of the Australian Centre for Financial Studies Kevin Davis told SmartCompany that although Australian banks do have some reliance on global capital markets for wholesale funding, the Reserve Bank of Australia has room to lower the cash rate in response to any higher lending costs.

“Given Australian banks’ funding position isn’t dire and given credit growth is not that strong [as it was during the start of the global financial crisis], the need for banks to expand their funding base is not as large as it was then,” Davis says.

Davis emphasises that despite this, the situation in Europe is dire and could impact the Australian economy in other ways.

“It’s more the general transmission of a climate of uncertainty and the potential for recession and so on, rather than solely a matter of negative impacts on Australian banks,” he says.

Future Fund chairman David Murray was no less pessimistic at the Australian Business Economists’ annual conference in Sydney yesterday.

“Europe with the fiscal issues it has will go through crisis after crisis both in the banking sector and with sovereign debt as they sort of struggle through and work through the two options, which are basically exit of members or default by no exit,” he says.

He warned Australia may follow Europe’s lead if both state and federal governments don’t balance their budgets, but said he saw things moving in the other direction.

“I don’t see governments trying to wind back their debt positions rapidly; I don’t see governments trying to reduce their size and trim their spending. I don’t see people coming off subsidy arrangements of industry, in fact new arrangements are more the norm.”

“I would have thought what’s happening in Europe would be one of the most timely wake-up calls in Australia’s history and it is being completely ignored because we’ve had 20 years of growth and the size of complacency here is outright dangerous,” he says.