Credit issue lingers

WHILE it is generally assumed that Australia sailed through the GFC unscathed, a lasting after-effect is the contraction in credit, particularly in the business and property development sectors.

According to a Midwood Report, credit growth was less than 1 per cent per annum in 2009, compared to 15 per cent per annum before the GFC.

Private investment is being severely constrained, and while public investment has taken up part of the pie, job growth, particularly in the housing sector, has been negligible.

The Midwood Report’s Bill Morris says the solution is not easy, because the credit contraction has been caused by the general shortage of credit around the world, hence the higher cost of credit.

Morris says a solution is to lower the required capital adequacy ratios of the top four banks (currently 8 per cent capital to assets) to 6 per cent for a limited period, in order to free up more capital for lending to specific economic sectors.

This would need to be assessed by the Reserve Bank in terms of liquidity and risk, but there is a desperate need for more liquidity in the private investment market.