The recent Global Financial Crisis has generated more cautious spending amongst Australians with many now prefering to pay off home loans and mortgages and focussing more on saving rather than spending.
In the period since the previous Financial Stability Review, global financial conditions have evolved in two distinct phases. The sovereign debt problems in the euro area escalated over the second half of 2011 as market concerns about debt sustainability intensified in a wider group of countries. Reflecting the links between sovereign and bank balance sheets, bank funding markets in the euro area came under intense strain, triggering fears of a bank liquidity crisis in the region.
The turmoil spread to global financial markets, leading to tighter wholesale funding conditions for banks in many countries, including Australia. Global market sentiment has improved noticeably since late December. To a large extent, this reflected the European Central Bank’s (ECB’s) three-year lending operations, which have greatly reduced funding risks for European banks. There has also been gradual progress towards enhancing euro area fiscal governance and dealing with Greece’s sovereign debt problems.
In addition, recent economic data in the United States have been more positive, somewhat allaying fears about a global growth slump. Accordingly, sovereign bond yields in Europe have declined from their recent peaks and equity markets have rallied globally. Bank share prices have increased in line with broader market movements, although in some cases they remain below levels seen in mid 2011. Pressures in bank funding markets have eased, but spreads are still fairly high.
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