With global stockmarkets having plunged by more than 40% from the 2007 peaks, it looks like Friday’s wipe-out may yet prove to have been the bottom.

A weekend’s contemplation plus various pronouncements by governments around the world sent the Australian stockmarket surging 5% in morning trade with financial and resource stocks leading the way.

And the Australia dollar has rallied about US3c to almost US68c this morning after Kevin Rudd’s big guarantee play.

However, Australia is in the lucky situation of having strong banks, so our equities market only reflects the forced global selling of liquid assets. If the likes of Morgan Stanley fall over, it will be a whole new ball game as the opaque $60 billion credit default swaps market steps up to fill the breach and we discover who really was left carrying the risk at the great credit casino.

Australia is facing two key risks right now. The first is the bursting of the commodities bubble. If nickel, zinc and copper spot prices don’t recover, there will be tens of billions of mooted investment projects scrapped. The carnage will be even worse if 2009 contract negotiations produce substantial cuts in coal and iron-ore prices.

The other big risk is a housing collapse leading to a recession and huge write-offs on that $1 trillion of household debt, which is the biggest component in Australia’s dangerously large $620 billion foreign debt.

Kevin Rudd stepped in to guarantee deposits and future bond issues in order to prevent bank runs and ensure our institutions can roll over more than $100 billion from foreign lenders over the coming year. The plunging dollar wasn’t helping so it’s important to see it back above US70c soon.

The foreign debt challenge also makes it crazy for the federal government to be talking about a stimulus package over and above the natural stabilisers in the federal budget.

In a credit constrained world, Australia must reduce its reliance on foreign debt which is currently rising by $60 billion a year through the dangerously high current account deficit.

Rather than bringing forward infrastructure investment, the Federal Government needs to sit down with the states and start discarding projects which are factored into their forward estimates.

The Australian public sector will be a substantial net foreign borrower in 2008-09, so the government should not be crowding out the private market for scarce funds.

People forget that Australia has the most lop-sided federal system. There is no bigger second tier of government in the world, so it is inaccurate to only talk about federal finances.

The states are highly dependent on property prices and turnover, both of which are plunging. State debt is forecast to rise by more than $20 billion in 2008-09. Rather than going further into hoc, it is time for the states to start balancing their books.

If that requires swingeing efficiency drives in NSW and for Queensland to bring its fuel taxes up to the national average, so be it. It’s one thing to guarantee all foreign bond issues, but as a nation we need to stop living on foreign debt. And that means cutting back on everything from imported plasmas to foreign-funded infrastructure projects.