10 Jun 2010

Debt crisis in Europe warning to households - RBA

6:34 am on 10 June 2010

The Reserve Bank of Australia says the rapid deterioration of Europe's debt crisis should serve as a warning for Australian households to reduce their debt.

Governor Glenn Stevens says the biggest lesson from the Greek debt crisis is that financial markets can ignore problems they know about for a long time, before a catalyst creates a sharp reaction.

"Markets can happily tolerate something for an extended period without much reaction, then suddenly react very strongly as some trigger brings the issue into clearer focus," he told a business function in Sydney.

Mr Stevens says Australia's public and corporate debt is very low compared to other countries, but the nation's vulnerability is its relatively high level of household debt.

"The big rise in debt in the past couple of decades has been in the household sector," he warned.

"There have been many reasons for that and, overwhelmingly, households have serviced the higher debt levels very well.

"But that doesn't mean it would be wise for that build-up in household leverage to continue unabated over the years ahead.

Mr Stevens says the current events in Europe have triggered a market response that is similar to the global financial crisis in quality, but not in magnitude.