According to the International Monetary Fund, Australia is well placed to withstand another global financial crisis. The news came just in time as Australian markets closed down by 2.7% following the news of the United State’s credit downgrading and worries over the ability of European countries to bail out the Italian and Spanish economies.
The S&P ASX200 closed down 119.3 points or 2.9% at 3,986.1 and the All Ordinaries fell 2.7% or 113 points to 4,056.7 on Monday 8th August fuelling fears that further market dips might follow the 10% which was wiped off global markets last week.
The Australian economy, however, was given a “favourable” outlook endorsement by the IMF, which, in its Article IV Consultation, pointed to the continued demand for Australian commodities in Asia as a strong plus factor. Australia was given a clean bill of health in the face of further global economic uncertainty:
“If global financial markets become severely disrupted or world growth falters, macroeconomic policy is well positioned to respond. The exchange rate would likely depreciate, limiting the fall in commodity prices in Australian dollars and providing stimulus to the non-commodity tradable sector. There is ample scope to cut the policy interest rate and provide liquidity support for banks, which proved effective in the global financial crisis. There is also fiscal space to delay the return to surplus and, if needed, to take temporary discretionary measures, given the low level of government net debt (6 percent of GDP).”
The opening of the Australian and Japanese markets had been widely anticipated over the weekend as analysts scrambled to forecast the likely impact of the Standard & Poor downgrading of US debt for the first time in history. The crisis was compounded as Italy and Spain required a bailout from the European Central Bank which has now agreed to buy their government bonds:
“The Governing Council of the European Central Bank (ECB) welcomes the announcements made by the governments of Italy and Spain concerning new measures and reforms in the areas of fiscal and structural policies. The Governing Council considers a decisive and swift implementation by both governments as essential in order to substantially enhance the competitiveness and flexibility of their economies, and to rapidly reduce public deficits.
“…It is on the basis of the above assessments that the ECB will actively implement its Securities Markets Programme. This programme has been designed to help restoring a better transmission of our monetary policy decisions – taking account of dysfunctional market segments – and therefore to ensure price stability in the euro area.”
It is hoped that the ECB statement, released yesterday, will ease tensions in global markets.
