Sydney - Australia's strong economy and sound banking system are well-cushioned against shocks from the US financial meltdown, market analysts said Wednesday.

Reserve Bank of Australia governor Glenn Stevens said Australia would weather the global financial storm.

"The corporate sector is quite liquid and profitability is generally pretty good too. As we see it, the corporate balance sheet of corporate Australia is very strong," Stevens said.

"There are some entities with high leverage and complexity and those entities are under pressure at the moment. We all know who they are."

Stevens was referring to financial-engineering firms like investment bank Babcock & Brown, Allco Finance and others, who used cheap credit to buy assets that they otherwise couldn't afford. Babcock & Brown has seen 80 per cent of its share price knocked off in the last 18 months and is having to sell assets cheap to stay afloat.

The stock market, which is back to the level it was three years ago, is not having the wild gyrations of other markets. On Wednesday it fell just 0.5 per cent. Analysts said one reason for that is the continuing resources boom and, in fact, the strength of the four major banks.

As the credit crisis worsened, second-tier financial institutions have withered and the big high-street banks prospered, because they can source their capital from their customers rather than from the international money market.

Jeffery Carmichael, chief executive of Promontory Financial Group, which advises bank regulators, warned that sovereign funds in China, Singapore and the Middle East will start biting off chunks of Western corporate business.

"The US can't sustain baling out these institutions," he said. "It was very interesting to see how they handled Lehman and AIG both getting into trouble at the same time. The message from the US Treasury was 'we can't afford to do both of these' so they basically said to the market 'you see if you can handle Lehman and we'll worry about AIG.' That's a sign of the limitations being put on the US Treasury."

Carmichael said the growth of sovereign wealth funds was driven mainly by overconsumption in the US economy, and is reflecting in the enormous US trade deficit.

"The scale out of the US of deficits is just mind-boggling. It's an accumulation of US assets building up in the rest of the world. US 'dis-saving' was absorbing about two-thirds of the world's net savings. So if you think of what the whole world was saving, two-thirds of that was being sucked up by US 'dis-saving,'" Carmichael said.

Carmichael, former head of Australia's Prudential Regulation Authority, said the country's financial sector was in good shape.

He suggested the current situation may have parallels with the 1980s, when corporate Japan used the country's massive surplus to buy up assets in the US, Europe and Asia - only to find it had paid too much and ended up selling many of them at a loss. dpa