VZCZCXRO1588
RR RUEHCHI RUEHFK RUEHHM RUEHKSO RUEHPB
DE RUEHBN #0058/01 1190507
ZNY CCCCC ZZH
R 290507Z APR 09
FM AMCONSUL MELBOURNE
TO RUEHC/SECSTATE WASHDC 4937
INFO RUEHZU/ASIAN PACIFIC ECONOMIC COOPERATION
RUEHPT/AMCONSUL PERTH 1568
RUEATRS/DEPT OF TREASURY WASHDC
RUCPDOC/DEPT OF COMMERCE WASHDC

C O N F I D E N T I A L SECTION 01 OF 02 MELBOURNE 000058 
 
NOFORN 
SIPDIS 
 
E.O. 12958: DECL: 04/29/2019 
TAGS: ECON ETRD EFIN AS
SUBJECT: BANKING CHIEFS CONCERNED ABOUT AUSTRALIA CREDIT 
DOWNGRADE 
 
Classified By: Justin Kolbeck, Pol/Econ Officer for Reason 1.4(d) 
 
Summary 
------- 
 
¶1. (C/NF) The CEO of Australia's largest bank and J.P. 
Morgan's Chairman for its Australia and New Zealand business 
see Australia losing its AAA credit rating as one of the 
worst case recession scenarios.  While both characterized the 
downgrade as unlikely, they expressed concern that the impact 
would be profound in a country that funds its current 
accounts deficit almost exclusively via foreign borrowing. 
The banking chiefs reaffirmed an oft-heard sentiment: that 
Australia has yet to see the worst of the slowdown, that job 
losses will continue to mount, and that a recovery in U.S. 
confidence will be a critical component to ending the 
Australian recession.  End Summary. 
 
Implications of a Credit Downgrade 
---------------------------------- 
 
¶2. (C/NF) Ralph Norris, Commonwealth Bank's CEO and Rod 
Eddington, Chairman of J.P. Morgan's Australia and New 
Zealand business separately expressed concern over the 
prospect of Australia losing its AAA rating.  During an April 
22 meeting, Norris told CG that Australia's current account 
deficit is funded almost exclusively from foreign lending and 
a credit rating downgrade would "ripple through the real 
economy."  While he said a downgrade is "not particularly 
likely," Norris did not discount the possibility and went on 
to say that he has warned Prime Minister Rudd to be cautious 
in his various stimulus packages to not be seen as "directing 
the banks" because rating agencies would view this negatively. 
 
¶3. (C/NF) Eddington, in a separate meeting on April 27, was 
less optimistic, noting that both he and Prime Minister Rudd 
"lose sleep" over the possibility of a credit downgrade. 
(Note: Eddington serves as an advisor to Rudd in his capacity 
as Chairman of Infrastructure Australia and told Consul 
General that he is a long time Labor Party supporter, and 
meets regularly with the Prime Minister.  Eddington also sits 
on the board of mining giant Rio Tinto, was once CEO of 
British Airways and is being considered for the Chairmanship 
of Australia's second largest bank, ANZ.  End note.) 
 
¶4. (C/NF) Local analysts have worried that a significant 
accumulation of foreign debt combined with escalating 
national budget deficits could strip Australia of its AAA 
rating and consequently saddle Australian households and 
businesses with higher interest rates as the economy 
continues to slow.  Eddington added to this, saying that the 
Rudd government's stimulatory plans to invest heavily in 
infrastructure would be significantly undermined by a 
reduction in Australia's credit rating and the resulting 
increase in interest costs. 
 
Australian Economy 
------------------ 
 
¶5. (C/NF) According to Norris, the global slowdown has forced 
Commonwealth to scale back acquisitions and other 
investments, but he noted that he is "reasonably comfortable" 
with his bank's capacity to weather future financial turmoil. 
 He explained that the bank is wary of acquiring assets or 
companies that may have unknown or immeasurable quantities of 
"toxic assets."  Norris added however, that Commonwealth 
remains bullish on the banking market in Indonesia and is 
positioning itself as a regional Asian bank.  (Note: Post has 
heard a similar sentiment regarding shifting from an 
Australia/New Zealand focus to a wider Asian approach from 
ANZ's leadership.  End note.)  Commonwealth, he continued, 
will likely take a hit however in its credit card, unsecured 
debt, and small/medium business lending which together 
constitute approximately 50 percent of the bank's book. 
 
¶6. (C/NF) Norris and Eddington both agreed that active fiscal 
and monetary stimulus led by the Rudd government had delayed 
Australia's entry into the global recession.  They both 
believe that a recovery in U.S. confidence will be necessary, 
however, for the Australian economy to make a full recovery. 
Eddington remarked that the Australian stock market "had 
fully priced in" the bad economic news on March 9-10 (read: 
hit its bottom), but the Australian economy has yet to see 
the worst of the downturn.  He believes jobs losses will 
continue to mount for at least the next twelve months. 
 
Response to U.S. Stimulus Activity 
---------------------------------- 
 
MELBOURNE 00000058  002 OF 002 
 
 
 
¶7. (C/NF) Norris and Eddington both said that they admire the 
United States for our collective ability to learn from our 
mistakes and quickly move on.  Norris added that two 
consecutive positive quarters (June, September) would go a 
long way to restore worldwide confidence.  He said, however, 
that recent attempts at regulation in the United States "have 
not been well coordinated," and that he does not see 
substantial new banking regulations in Australia's future. 
Eddington expressed concern, that key appointments at the 
U.S. Treasury department are moving too slowly; it is 
"important for the engine room to be adequately staffed," he 
said. 
 
Housing Bubble? 
--------------- 
 
¶8. (C) Despite Commonwealth's recent decision to tighten 
lending requirements and to raise rates on home loans, Norris 
said that he is not concerned about an Australian housing 
bubble.  Although the New South Wales real estate market 
peaked in 2003, he noted that there are some hotspots in 
Melbourne, Queensland and Western Australia that may 
"soften."  Norris pointed out however, that serviceability on 
mortgages has improved since the 1991-1992 recession with the 
average percent of Australian's income spent on their 
mortgages declining from 15 to 9 percent.  Norris estimates 
Commonwealth's default losses on "bad home loans" at around 
1.5 percent.  Eddington believes that unlike prior real 
estate slow downs, there is no glut in either residential or 
commercial real estate.  "We will likely see a 15 percent 
decline, rather than a 50 percent decline," he added. 
 
Comment 
------- 
 
¶9. (C/NF) Post is hearing measured tones of optimism from our 
business contacts.  While there are ominous shapes on the 
horizon, our contacts are now beginning to talk about a "last 
in, first out" Australian recession.  Most will caveat this 
optimism, however, by noting that it is still too early to 
begin to predict the length of the Australian recession and 
point out that things will still likely get worse (higher 
unemployment, lower profits, and continued pressure on 
manufacturing) before they get better. 
 
THURSTON