City Eye: It's all our fault. Just ask the Australians

The upside-down view of the City – this week's column comes to you from Sydney – is no prettier than the European weather.

There is a mild sense of bewilderment and grudge towards the UK and the US from down under. The Australians look at our ills, see the same grave symptoms in their own economy, and somehow blame us for it all. This affords a rare opportunity to see ourselves as others see us, viewed through their own crises.

House prices here are a good place to start. They are, if anything, in an even more parlous state than in the UK. On the one hand, real estate is hideously expensive. A nice little Paddington terrace near the Sydney cricket ground will be just as expensive as in London – not Kensington, but Battersea with attitude. On the other, the cost of servicing the debt is crippling. The Real Estate Institute here says that 37 per cent of the average Australian household income goes on mortgage repayments (it is around the 20 per cent mark in the UK). As inflation picks up, an interest rate rise is widely predicted this week. One doesn't need to be a Nobel Laureate in rocket science to see a nasty retrenchment ahead.

Property price inflation is just part of a wider malaise. Another, more worrying aspect is the remorseless rise of commodity prices. Wheat spot prices shot up 25 per cent in a single day last week. If that sort of thing continues, more interest rate rises – or a radical attitude that welcomes inflation – are inevitable.

The problem of inflation is clear. The cause is less so. According to some, the root of all the trouble is the pesky Americans and Brits with their idiotic idea that biofuels are a good thing. Growing crops for fuel is stoking this inflation, allegedly. The fact that it takes some 60 litres of water to create a single litre of biofuel doesn't help much in ecological terms, either.

And then there's the cold that Australian share markets have caught from the northern hemisphere. ABC Learning is the world's biggest quoted infant day care centre. Its share price tanked so alarmingly last week that its shares were suspended. The management bleated about foreign hedge funds manipulating the markets, but few people buy that. Most eschew thinly veiled xenophobia in favour of the view that the company was simply carrying too much debt. But who decides what's too much?

Some here argue that the debt became burdensome because of higher rates and the northern hemisphere disease of irresponsibility. Yet arguably worse is the culture of retrenchment setting-in among banks. Heavily indebted companies such as ABC are going to have the rug pulled out from under them in the next few weeks. While Australians hate the disease they've caught, they're going to dislike the cure more.

The UBS question

Litigation test case of the century so far is definitely the suit brought by the small European banks against UBS. The essence is simple: who sold what to whom, with the emphasis on the "what". What was really in those securitised debt packages? Did the seller know? Or is it just a case of caveat emptor? If the small banks win – as they may deserve to – we shall see nothing less than the death of lending. At least for the foreseeable future.

Milking it

It takes some doing these days, but I've found a bull market. Dairy farmers are in such short supply in New Zealand that TV commercials beg trainee accountants and manicurists alike to go and find gold in them there udders. Which makes "bull market" a technically inaccurate term, I suppose. Perhaps cow market is better.