Australia must curtail its debt binge in 2017

Australia's highly levered economy could pose serious problems down the road, according to a new Columbia Threadneedle report.

Columbia Threadneedle's head of government and foreign exchange, Matthew Cobon, singled out Australia and New Zealand as countries with low government debt ratios that are nonetheless endangered by highly levered private sector balance sheets.

"A real estate-funded debt binge combined with a very poor productivity record has created problems for both economies," he said.

"Should the focus shift to debt sustainability and away from reflation, these currencies will become vulnerable once more. Both countries could see a significant rebalancing in their currencies in 2017."

His comments echo a recent Auscap report, which found that the conditions driving up real estate prices in Australia - low interest rates, high debt levels, low unemployment and strong economic growth - have led to "excesses in the system."

Auscap said that the risks facing this debt-driven market are interest rates rising in the medium-term; the potential for unemployment to rise; the likelihood that "domestic economic growth probably has more natural headwinds than tailwinds"; and that "debt levels are high in the context of historical household leverage ratios and may fall over time, meaning that any deleveraging would most likely have a negative impact on prices."

Read more: AustraliaColumbia ThreadneedleAuscapMatthew CobonNew Zealand
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