Australia was one of the few developed economies to avoid a major recession after the global financial crisis. Its solid economic performance was driven by large cuts in interest rates (from 7.25 per cent to 3 per cent), government guarantees for banks and government stimulus (equivalent to 6 per cent of gross domestic product).

But the main driver was China's strong growth and the related commodity boom. Australia has benefited from a substantial increase in demand for and prices for its mineral products. But its vulnerability has increased sharply.

Lower growth in China resulting from the slowdown in Europe, its largest trading partner, may trigger falls in commodity prices and volumes, affecting Australia's economy adversely.

History suggests that mining booms are finite and end suddenly, causing significant disruption.

The domestic economy remains weak. Simultaneous deleveraging (debt reduction) by individuals and companies outside the mining sector and by governments seeking to return the budget to surplus is reducing domestic demand.

Debt levels remain high. Between 1991 and 2011, household debt rose from about 49 per cent to 156 per cent of disposable income.

In 1989, when mortgage rates were 17 per cent, the ratio of interest payments to disposable income was 9 per cent. Now, despite the fact that mortgage rates are about 7.5 per cent, the ratio has increased to about 12 per cent.

As households increase savings and reduce debt, consumption will be weak, helping to curb economic growth.

The high Australian dollar, driven by the commodity boom, places exporters at a cost disadvantage and also makes it difficult to compete with cheaper imports.

Affected sectors include key Australian export industries that are significant employers, such as education services, tourism and manufacturing.

Australia may lose up to 170,000 manufacturing jobs over the next 10 years, almost double job losses in the past decade.

Problems with sovereign debt abroad and related pressures on the banking system will decrease available funding and increase borrowing costs for Australian banks and firms reliant on overseas capital.

Australian banks face international refinancing pressures, needing about A$80 billion (HK$670 billion) this year. Australian companies need to refinance about the same amount of maturing loans this year.

The problems of European banks are affecting the supply of credit. Before the 2008-09 credit crisis, those banks provided about 35 per cent of loans to Australian corporations. This fell to about 16 per cent last year and is likely to decline further as a result of banks' losses on sovereign bond holdings, pressures on bank capital and increases in US dollar funding costs.

European banks are looking to sell all or a portion of their Australian loan portfolios to alleviate the pressures. They are also cutting back on new lending to clients in Australia, focusing on their home markets in Europe.

Overvalued houses and high household debt increase vulnerability to an economic slowdown, with an accompanying rise in unemployment, and to higher mortgage rates.

A recent survey from The Economist found Australian houses overvalued by 53 per cent based on rents and 38 per cent measured against income levels, compared with historical averages.

The level of overvaluation is greater than in the United States at the peak of its housing bubble.

Australian banks are heavily exposed to residential real estate, which is about 60 per cent of bank assets, compared with 30 per cent to 40 per cent in most developed economies. A credit crunch or recession could cause house prices to fall, worsening domestic conditions, which would in turn affect domestic banks.

To address that situation, the central bank would drive down interest rates further. Meanwhile, a slowdown in China would dent Australian exports, potentially pulling down the currency.

That would be a bad outcome for any investor holding interest-rate sensitive instruments in Australian dollars, such as the ever-popular Aussie dollar fixed deposits.

Australia has some flexibility. Public debt at about A$250 billion is a modest 22 per cent of GDP, providing leeway to stimulate the economy. Australian interest rates are relatively high (official rates are 4.25 per cent), providing flexibility to cut borrowing costs to buffer any shock.

The currency is flexible, and a fall in value of the Australian dollar would help cushion any weakness, as was the case in the 1997-98 Asian crisis and again during the global credit crisis.

But perhaps the most worrying sign for investors is that Australian Treasurer Wayne Swan was recently anointed as the world's best finance minister. It is worth noting that a previous Australian treasurer, Paul Keating, received similar accolades in 1984, only to subsequently preside over a deep recession.

Satyajit Das is the author of Extreme Money: The Masters of the Universe and the Cult of Risk