Phone call could ‘crash prices 80pc’
"YOU must save your banks at all costs."
According to late Irish finance minister Brian Lenihan, that was the message he received on his phone from European Central Bank chief Jean-Claude Trichet on September 27, 2008, at the height of the financial crisis.
Three days later, Ireland's government announced a controversial blanket guarantee of the banks. Over the next two years, the country's banking and property sectors collapsed, costing taxpayers €64 billion ($100 billion).
"Our banks were very dependent on obtaining funding from other countries, and once that began to dry up we knew that would create very serious problems for the Irish banking system," Mr Lenihan said in a 2010 TV interview before his death.
"Mr Trichet rang me and hadn't been able to get through to me. I was at a racecourse in County Kilkenny at a (party) event. So I caught up on Mr Trichet's message the following day, which was that, 'You must save your banks at all costs'."
While Mr Trichet would later deny such a call ever took place, insisting he did not "blackmail" Ireland into a series of financial measures culminating in the November 2010 bank bailout, experts have drawn comparisons to Australia's situation a decade later.
In a provocatively titled video, "Will one phone call drop home prices by 80 per cent?", Digital Finance Analytics founder Martin North, economist John Adams and PhD student Sean Quinn, who was in Ireland at the time, discussed what would happen here in a similar scenario.
They debated whether, in the event of a major financial crisis, Australia should similarly agree to guarantee its banks - or let the whole system collapse and "reset".
Rather than coming from the head of the ECB, the "one phone call" in this case would likely be from the United States to Prime Minister Scott Morrison or Treasurer Josh Frydenberg.
About $260 billion of Australia's $486 billion 90-day debt comes from Wall Street, with most of that funding held by the Big Four. Australia's total household debt to GDP is now one of the highest in the world, at 120 per cent.
With taxpayers footing the bill, house prices in Ireland fell by 40 per cent. Without the bank bailout, Mr North believes they would have fallen by double that. In Australia's case, that would plunge Australia into a depression to rival that of 1892.
"You've got to say, let's understand what created the problem in the first place, which is the debt bomb," Mr North said.
"If we are simply just kicking the can down the road, we've actually not solved anything, we've just moved the problem out a bit but we haven't actually fundamentally thought about how to reset the economy.
"It seems to me at some point, there has to be an 'alt-control-delete' on the way the economy works. Tough though it would be, if I were getting that phone call I'd say I think that short, sharp, deep recession is probably the least worst option."
Mr Adams said there was "no denying that there are many parallels between Australia's economy today and the Irish economy" in 2006-07.
"If an international economic shock were to occur, it is conceivable that one or more of Australia's banks could be placed in a situation similar to Anglo-Irish Bank," he said.
"In this scenario, Australia has a very clear choice between using taxpayer money to bail out international creditors or to send the Australian economy into a depression that would rival the 1892 depression which was the worst economic crisis in Australia history."
Last week, Mr North featured in a 60 Minutes episode warning of an impending property crash. The episode Bricks and Slaughter received mixed reviews.
SQM Research founder Louis Christopher, who also featured, said he was "disappointed" in the show and that it had "distorted" his views by presenting only his comments about real estate being overvalued.
In a series of tweets after the show, Mr Christopher said he did not believe the housing market was going to crash.
"Sydney and Melbourne are significantly overvalued but I take the view the overvaluation will likely unwind over a longer period of time," he said.
"I stated in my interview with 60 Minutes the risks as well as the safety valves that are still present in the market - strong local economies, strong population growth, banks very unlikely to fail. The program covered my comments on the risks and overvaluation only."
Mr North also clarified his position, saying he never claimed prices would fall 40-45 per cent in the next 12 months as stated by 60 Minutes.
He said he outlined four scenarios, with only a 20 per cent chance of a severe correction if the US economy stalls as rates there rise, creating a "GFC mark two".
That would cause Australian property prices to fall 40-45 per cent over three years. "But this is not my central scenario," he said.
It comes as US analysts warn of ballooning global debt that now stands at $US247 trillion. "We think the major economies are on the cusp of this turning into the worst recession we have seen in 10 years," Elliott Wave International head of global research Murray Gunn said in a note.
"Should the (US) economy start to shrink, and our analysis suggests that it will, the high nominal levels of debt will instantly become a very big issue."
Economic commentator Peter Schiff has forecast a major downturn as early as the end of US President Donald Trump's first term.
"We won't be able to call it a recession, it's going to be worse than the Great Depression," he told the New York Post. "The US economy is in so much worse shape than it was a decade ago."