Australia 'should escape subprime pain'

Rising defaults on sub-prime loans helped spark sharp falls on Wall Street last week, as companies and investment funds linked to the sector were punished by the market.

The sub-prime loan market provides finance for borrowers with credit history problems in exchange for higher interest rates.

In many cases, the loans have been repackaged and sold on to financial institutions which have found themselves under pressure as the borrowers defaulted.

Speaking on ABC television, National Australia Bank chief executive John Stewart said the magnitude of the problem in the US was wide.

"It's very serious and it's got a lot further to go, it's about 15 per cent of the mortgage market in the US," Mr Stewart said.

"To give you an idea, that is about 1.3 trillion dollars. Right now about 20 per cent of it is in arrears."

US hedge funds associated with sub-prime mortgages would feel further pain, he said, possibly for another two years.

"People will lose money, of that there is no doubt," he said.

"There is a lot of bad debts out there that have to come out some place and because not only have they sold as packages of sub-prime mortgages they are also leveraged up with debt and sometimes leveraged up several times."

But the Australian banking system did not face the same threat.

"Similarities (are) next to nothing, there's 15 per cent of the market there, less than one per cent of the market here."

The Australian economy would also largely withstand any weakening in the US economy, he said.

"The implications for Australia luckily are quite small because there's no direct effect in Australia," he said.

"We still don't think it will have a major effect on GDP (gross domestic product) in Australia simply because our major trading partner right now is China and there is a huge trade with China."

Mr Stewart also said there was a 50/50 chance the Reserve Bank of Australia would lift interest rates after it meets on Tuesday.

"I think there is probably a 50 or 60 per cent chance they would, but they may just look at what's going on in the world just now and say leave it for an extra month," he said.