ANZ chief economist Saul Eslake shares his insights on the global credit crisis, Australia's economic shape and the outlook for businesses.

How has the sub-prime crisis heightened risks across world foreign exchange, credit and interest rate markets?

The price of risk has increased dramatically and there has been a loss of confidence in credit ratings and in the ability to assess risk and price accurately. For a very large category of borrowers the securities markets have for the time being shut down while for those to whom credit is available through the securities markets it is only available on much more demanding terms.

So what are the key risks to Australian financial and investment markets going forward?

The biggest risk is that of ongoing stresses and strains in the banking system. Australia has the fourth largest current account deficit in the world, predominantly financed through the overseas borrowings of the major Australian banks. If credit continues to become more expensive and difficult to attain globally, Australia will find it much more expensive and difficult to finance its current account deficit. This will flow through to the Australian economy and business borrowers.

With economic conditions worsening in the US, what is the outlook for Australian companies who rely on international business?

It depends on where their business comes from. Businesses whose primary markets are in the United States or Europe will find it tough as these economies are experiencing sharp slowdowns. Japan is also facing a fairly fragile business outlook.

Conditions for businesses that predominantly export to developing countries such as China or India will be pretty good. Although in the short-term, these businesses may suffer an adverse impact on revenues and competitiveness due to the rising Australian dollar.

Which poses the greatest threat to the Australian economy – inflation or the credit crunch?

I don't think you can say yet. In aggregate the impact of the credit crisis has largely offset the positive effects of ongoing increases in commodity prices and that will continue through 2008-09. Unfortunately, that will intensify the pressure on inflation and on official interest rates.

Is the credit crunch likely to have long-term implications for financial markets? I guess the million dollar question is how long do you expect it to last?

Although some of the characteristics of credit markets in the last five years will probably never regain their previous depth or height. The present crisis is likely to get worse before it gets better. We still don't know the full extent of the losses that are likely to be incurred on various credit market instruments and I think that the crisis and its consequences will be around for somewhere between one and three years. Read the full article.

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