Australians' debt worries may blunt economic stimulus

SYDNEY (Reuters) - A decade-long credit binge by Australians has left them struggling with a mountain of debt which may blunt central bank and government moves to stimulate the economy and avoid recession.

While the Reserve Bank of Australia has slashed official cash rates to encourage Australians to spend in the face of a global downturn, high and rising credit card rates are seeing them close their purses and wallets.

Worries about household debt also looks set to limit the national government's A$10.4 billion stimulus package when it starts flowing next month, with surveys showing Australians will not spend their share but pay off mortgages or other debt.

"The fact that households are so indebted, particularly with credit cards, and household debt as a proportion of income is so high, there is a chance it is impeding monetary policy," Josh Williamson, senior analyst at TD Securities said on Thursday.

Over the past decade Australians have gone on a credit binge, their confidence underpinned by 16 years of consecutive economic growth, high employment, soaring house prices and low interest rates.

Australians have leveraged themselves like never before, buying shares and investment properties and taking out home-equity loans to pay for holidays, boats and cars.

In the past 10 years, total housing debt (owner and investor) has soared to A$981 billion from A$236 billion in 1998.

Credit card debt has quadrupled to A$44.6 billion from A$11.6 billion, on the back of a 64 percent rise in the number of credit card accounts to 14.2 million.

However, economic optimism is now evaporating quickly as the global financial crisis starts to hit Australia's shores.

Australians are becoming pessimistic and worried about job security, say several surveys, despite the fact the local economy continues to grow and few have lost jobs or homes due to the credit crisis.

WARNING

The Reserve Bank of Australia governor Glenn Stevens has warned Australians not to talk themselves into a recession.

"Given the underlying strengths of the economy, about the biggest mistake we could make would be to talk ourselves into unnecessary economic weakness," Stevens said on Wednesday.

Still, economic growth is slowing rapidly. Some economists have penciled in growth of just 1 percent next year, a sharp slowdown from 4 percent in 2007.

Neighboring New Zealand, Japan and the euro zone are already in recession and the United States is considered by economists to also be in recession.

Australia's central bank has slashed official cash rates by 200 basis points since September and is widely expected by financial markets to cut rates in December by a further 75 basis points, with further easing to around 3.5 percent next year.

Banks have followed with cuts in mortgage interest rates, giving Australians spare cash each month, but credit card interest rates have remained unchanged or in some cases risen.

While home loan rates are around 7.5 percent, credit card rates average around 20 percent.

"There is a possibility that some of the banks may be using credit card rates to help subsidize cutting mortgage interest rates -- particularly considering its the mortgage interest rates that are much more politically sensitive," said Williamson.

"While it is good to see mortgage rates coming down we also need to see cuts in credit cards," he said.

AUSTRALIANS STRUGGLING WITH DEBT

A five-year study of over 8,000 Australian workers has found that 56 percent are finding it difficult to get by on their household income, or are just coping.

The University of Sydney study found 12 percent of households with income exceeding A$156,000 a year do not make all their debt repayments on time, while one in four households earning less than A$78,000 a year cannot pay their debt on time.

"Many households rely on debt such as mortgages and credit cards to maintain their standard of living. One in five workers report being unable to pay debts on time," said the report by the university's Workplace Research Center.

A survey by the Australian National Retailers Association has found that 40 percent of consumers will not spend their share of the government's A$8.7 billion cash handout starting December 8 that is aimed at stimulating the retail sector.

The handout is the first tranche of the government's A$10.4 billion stimulus package.

The association said the handout was aimed at a demographic which spends most of its income on living expenses and was timed to encourage Christmas spending. But the survey of 1,000 Australians found many will either save it or use it to pay off debts.

"Not even falling interest rates has budged people's thinking -- Australians are playing it safe with their money," said the association's chief Margy Osmond.

Retailers hope official rates will be cut again in December to encourage Christmas spending, but they also want to see credit cards rates fall, arguing "plastic money" is now one of the main ways Australians purchase goods and services.

But high interest rates are stopping consumers using their credit cards, with card debt now growing at the slowest pace in 14 years, said CommSec Equity Economics.

"Consumers are adopting a more conservative approach to credit cards, in a clear attempt to cut back on spending and throw out debt," said CommSec chief economist Craig James.

($1=A$1.57)

(Editing by Neil Fullick)