Suggestions that Australia is the second most likely country in the world to suffer a debt crisis and recession within three years are overblown, Capital Economics says in a rebuttal to a high-profile article by economist Steve Keen. 
In an article published last week by Forbes magazine, Professor Keen, an Australian-born economist, used a rule of thumb and data from the Bank of International Settlements to predict the seven countries most vulnerable to a debt crisis and recession over the next one to three years. 
Australia placed at No.2 in the list of seven, despite not having experienced a recession in 25 years. China, whose economy has faltered in the past two years, came in at number one, while Hong Kong, South Korea, Canada and Norway completed the list.
Professor Keen, who is head of economics, politics and history at Kingston University in London, suggested that a country is at risk if the level of debt held by the non-financial private sector is worth more than 175 per cent of that country's GDP and if that debt to GDP ratio has risen by more than 10 percentage points over the past year.
But Capital Economics' chief Australia and New Zealand economist, Paul Dales, said while Australia fits the maths - late last year the private debt-to-GDP ratio was over 205 per cent and had risen by 13 percentage points over the year - the most recent economic data suggested that the risks of a debt crisis may even be receding rather than rising.
The real risk came from the housing sector, with debt-to-GDP ratio rising to a record high 125 per cent. 
"Since 70 per cent of that is made up of housing debt, it all boils down to whether or not you believe that the rise in housing debt is built on shaky foundations," he said. 
But Australia's household debt-to-GDP ratio looked higher than it actually is, he said. "It doesn't take into account the cash that households have in offset accounts."
"Many borrowers have taken advantage of the fall in their mortgage payments triggered by low interest rates to raise their savings in offset accounts. This effectively means they are paying down their mortgage faster than required." 
Lending standards since the global financial crisis have tightened, and have reduced the share of low-documentation and non-standard mortgages, which are akin to the sub-prime mortgages that spurred the 2008 crisis, he said. 
"These mortgages account for just 2.1 per cent of the stock of all mortgages compared with 8.5 per cent in 2008."
  Interest-only mortgages a concern  
The biggest concern was that 40 per cent of all mortgages were interest-only mortgages, more vulnerable to interest rate rises. But tightened lending conditions have shrunk the share of these among new loans in the market. 
There were other reasons to be concerned, said Mr Dales, who has one of the more bearish outlooks on the Australian economy, predicting up to two more rate cuts by the Reserve Bank of Australia this year.
"There's a risk that at some point a major fall in house prices and/or a rise in interest rates will mean that some of the debt won't be repaid," he said, immediately adding that the latest data suggest that the risk isn't as big as it first appears and that it may even be shrinking.
Mr Dales warned against complacency and doesn't want to completely rule out a debt crisis, but said if it happens it would take a few more years.
"The real problem probably won't emerge until the RBA starts to raise rates from record lows, which may not happen for a year or two yet."
The cash rate is 2 per cent, and economists expect this to either remain on hold this year or be cut again.