Showing posts with label australian economy. Show all posts
Showing posts with label australian economy. Show all posts

Tuesday 14 February 2012

Australia is caught in a credit crunch and the banks just made it worse, not better.

Banks' rate moves reveal system cracks

David Llewellyn-Smith
February 13, 2012

The media reaction to the banks' Friday rate hikes has been dominated by a schoolyard binary construction of the problem: the banks versus the government.
Some have taken the side of the government, that the banks are a greedy bunch of so and sos. Most have taken the side of the banks, that the government has no right to interfere in private business decisions.
Laudable sentiments if the banks are private. Which they are not. But let that pass.
This columnist has already written that what's really at stake here is the political economy of banking and the government's failure to openly address that fact is now coming back to haunt it.
Instead this column will argue a much simpler point: Australia is caught in a credit crunch and the banks just made it worse, not better.
How so? To understand you have to have a handle on the basic tenets of banking. Like all businesses, banks have a balance sheet. There are two halves to the balance sheet: assets and liabilities.
For banks it's a little confusing because outgoing loans - for houses, cars etc. - are in fact assets. They are the stuff from which banks draw an income.
The bank's liabilities are also loans, but those taken from others, like deposits or bonds. The difference between these two is the bank's equity or capital base.
The ratio between the amount of capital and total assets is called the leverage. It's the number of times against which the bank's capital has been multiplied in its outgoing lending book.
That's it, not so hard.
Trouble triggers
There are two ways in which a bank can find itself in trouble. The first and most common is when its assets - the loans it has given to its clients - deteriorate in quality.
This problem happens when the folks who borrowed the money struggle to repay it. They might have lost their job, or the asset they offered as collateral against the loan - say, a house - may have lost value and their own balance sheet is under pressure.
If they sell, they can't repay the whole loan amount. You can see how this process can feed upon itself as distressed sales leads to more falling prices.
At a certain stage the banks themselves get into trouble as enough assets are impaired and their capital begins to decline. They must then restrict lending and the problem gets worse again. This is called a credit crunch.
This is what happened in the US. Australia is also in the early stages of such a process with falling house prices, rising unemployment and rising impaired loans at the banks. It's difficult to judge how far into this we are and whether it can be reversed.
The jobs generated by the mining boom offer the hope that it is possible to arrest the decline and instead of a credit crunch we get a stall in housing and a redistribution of capital elsewhere.
The primary protection against the process getting out of control is monetary policy, or interest rates, which can be lowered to alleviate the borrower stress at the heart of the problem.
Nervous creditors
The second way in which a bank can find itself in trouble is on the other side of the balance sheet: the liabilities. This happens when the people lending money to the bank - depositors or investors - get nervous and want a higher interest rate to give the bank their money.
In the past this was not much of a problem for Australian banks as they relied upon steady deposits. However, after the new millennium began, the banks went a bit nuts borrowing less stable money from investors here and abroad and loaned that money largely to punters betting on houses.
Now, through a combination of the troubles in Europe, the fact that the process of deteriorating assets is under way, and through their own incompetence in the mishandling of covered bonds, investors want much higher interest rates to lend our banks money.
So yes, they need to raise interest rates to extract more money from the other side of the balance sheet to compensate. If they don't then they'll not be able to lend money on unprofitable loans and the credit crunch still transpires as the banks limit the supply of credit.
In short, whichever way the banks turn right now, whether they pass on their borrowing costs to mortgagors and put downward pressure on their assets, or they absorb the higher funding costs and stop making unprofitable loans, we edge further into a credit crunch. And indeed, as you can see, the two halves of the balance sheet aren't at all separate.
Credit crunch
As risk builds in one then it has a deleterious effect on the other and so another feedback loop threatens. This is systemic stress and is exactly where we are now, whether you want to blame the government or the banks (or, in this writer's case, the politico-housing complex).
So, the only question that matters right now is this: can the RBA arrest this developing feedback loop by cutting interest rates?
To my mind it is now clear that the central bank, which handled its actions flawlessly last year, erred dramatically last week in staying on hold.
By pushing the banks to hike unilaterally, the first time in history, the banks have shaken the foundation of the one commonly (and sensibly enough) held truth in Australian asset markets, that when asset prices decline, unemployment or other economic adversity threatens, the RBA will save us by cutting interest rates.
The insurance is still there but a nasty crack now runs through its base and this commentator can only see this making asset markets worse.
We're into a credit crunch all right.
David Llewellyn-Smith is the editor of MacroBusiness and co-author of the Great Crash of 2008 with Ross Garnaut. This is an edited version of a longer article available free at MacroBusiness.


Read more: http://www.smh.com.au/business/banks-rate-moves-reveal-system-cracks-20120213-1t0ce.html#ixzz1mIsQMilO





All the Big Banks lift Rates


Eric Johnston
February 13, 2012 - 5:46PM

ANZ won't rule out more job cuts

Despite slashing 1000 jobs and raising mortgage rates to protect profit margins, ANZ Australia CEO Philip Chronican says there could be more pain.
The Commonwealth Bank and National Australia Bank have become the latest banks to raise their variable lending rates outside the Reserve Bank's regular monthly cycle.
National Australia Bank this evening said it would lift its standard variable home loan interest rate by 9 basis points to 7.31 per cent.
Earlier, the Commonwealth Bank, Australia's biggest mortgage bank, announced that its standard variable mortgage rate will rise 10 basis points to 7.41 per cent from February 20.
CBA AFR 090827 MELB PIC BY JESSICA SHAPIRO...GENERIC commonwealth bank, banker, interest rates, big four, four pillars, pedestrians, customers.AFR FIRST USE ONLY PLEASE!!! DIGICAM 112727
Commonwealth Bank and regional lender Bendigo and Adelaide Bank become the latest banks to break ranks with the RBA. Photo: Jessica Shapiro
The moves round out the out-of-cycle rate rises among the big four banks.
Also today, Bendigo and Adelaide Bank increased its standard variable mortgage rate 15 basis points to 7.45 per cent.
Westpac and the ANZ defied Treasurer Wayne Swan and lifted variable rates 0.10 and 0.06 percentage points respectively, on Friday, despite a decision by the Reserve Bank to hold its cash rate steady. The ANZ bank today announced it would cut 1000 jobs by September 30 to cope with weaker demand for banking services.
Rising costs
As with other banks, CBA blamed today's rate increase on rising funding costs, adding that greater uncertainty emanating from Europe was exacerbating the situation.
“In making this decision, we have been cognisant of our total funding costs, of which the official cash rate is only one factor,’’ said CBA group executive of retail banking Ross McEwan.
‘‘The Commonwealth Bank believes Australian banks should continue to price sensibly, taking into account factors both on and offshore, rather than experience similar problems to those that many banks overseas have experienced,’’ Mr McEwan said.
"Whilst we understand that any increase in interest rates is not favourable to borrowers, our millions of deposit customers are favoured and since the commencement of the GFC we have seen significant competition in retail deposits pricing," he said.
CBA said it would raise the interest rate on its six-month term deposit account by 20 basis points, also effective February 20.
National Australia Bank, the last of the four big banks to announce its interest rate stance, said it is reviewing its rates.
Commonwealth Bank shares rose 41 cents, or 0.8 per cent, to $50.29, slightly less than the overall market's gain. Bendigo and Adelaide Bank shares rose 6 cents, or 0.7 per cent, to $8.19.
Bendigo move
Bendigo, like ANZ, has also said it would review interest rates independently of the Reserve Bank. Westpac's new variable mortgage rate is 7.46 per cent and ANZ's is 7.36 per cent.
Bendigo managing director Mike Hirst said current banking margins are not sustainable and adjustments to interest rates must be made.
“This is not a popular move, we know that, but it is the right thing to do to restore a proper balance between depositors, borrowers, the Bank’s shareholders and our community partners. At current funding cost levels that balance is out,” he said.
At current pricing levels banks were “subsidising mortgages,” Mr Hirst said.
“If you look at the traditional role of a bank this makes no sense and is unsustainable,” he added.
Mr Hirst said banks had a fundamental choice to make: adjust the pricing on loans or restrict lending. He added the latter option would have significant implications for the economy and would not be the right thing to do at this point in time.
He also said many staff at Bendigo have taken unpaid leave to help reduce costs, while no new back office staff are being hired.
Bendigo’s new mortgage rate will apply from February 21.
ejohnston@theage.com.au, with Chris Zappone


Read more: http://www.smh.com.au/business/all-the-big-banks-lift-rates-20120213-1t1ae.html#ixzz1mIuF0oCu

Tuesday 11 January 2011

Australia: Credit Suisse tips sharp GDP fall in 2011

Credit Suisse tips sharp GDP fall in 2011
January 10, 2011 - 3:54PM

Investors should sell resources stocks and position portfolios defensively in 2011 ahead of a likely sharp slowdown in Australia’s economic growth, according to Credit Suisse.

The global bank today voiced a position contrary to the Reserve Bank’s outlook and the market consensus, both of which expect strong growth in Australia’s gross domestic product (GDP) over the next two years.

Borrowers face high interest rates, banks are tightening lending criteria and the Australian dollar is overvalued relative to base metals prices, Credit Suisse’s analysts Adnan Kucukalic and Atul Lele told clients today.

This adds up to very tight monetary conditions, ‘‘historically consistent with a near hard-landing over the next year’’, they said in a note.

‘‘As a whole, monetary conditions are pointing to a sharp slowdown in GDP growth in 2011.’’

Most economists expect between two and four more interest rate hikes by the RBA this year, adding another 100 basis points to the current cash rate of 4.75 per cent in an effort to curb inflation pressures from China’s growth and the local mining investment boom.

Home borrowers expect the same, with Mortgage Choice reporting an increase in the take-up of fixed rate mortgages during December to buffer the hit to household budgets.

Fixed rate home loans now account for 15.22 per cent of all mortgages, up from 11.24 per cent in November when the RBA last raised the key interest rate, the national mortgage broker said.

Credit Suisse said the RBA should be cutting rates in 2011, especially if China continues to raise its interest rates to counter inflation. This would slow China’s growth, which would produce a headwind for local resources stocks.

Local investors should rotate out of resources stocks and take a defensive portfolio position, favouring interest rate-sensitive stocks such as retailers and banks, Credit Suisse said.

Although looking cheap when measured by conventional metrics, the Australian share market is expensive based on the long-term trend and should trade flat or lower in 2011, the analysts said.

The benchmark S&P/ASX 200 lost 2.6 per cent in 2010 to finish at 4745.2 points. It closed at 4712.3 points today.

AAP

http://www.brisbanetimes.com.au/business/credit-suisse-tips-sharp-gdp-fall-in-2011-20110110-19kw4.html

Sunday 23 May 2010

Rebound staves off the GFC Mark II

Rebound staves off the GFC Mark II

TIM COLEBATCH AND RICHARD WILLINGHAM
May 22, 2010

THE biggest fall on global financial markets since the panic of 2008 halted suddenly in Australia yesterday, raising hopes that markets might avoid a second catastrophic meltdown.

After a month of almost unbroken falls - more like free-fall over the past week - share prices and the Australian dollar rebounded strongly during yesterday's trading after opening sharply lower.

In a roller-coaster day on the markets, the dollar fell, rose and fell again. Its journey took it from US80.73¢ in early trading to US83.65¢, then back to US82.69¢ by the evening.

On the stockmarket, the benchmark S&P/ASX200 index began 2.5 per cent down after Wall Street overnight suffered its biggest fall for more than a year, widely attributed to fears of a slump in Europe and a slowdown in China. But, unexpectedly, it began creeping back up, then the creep became a bound, and it ended up just 0.25 per cent lower at 4305.4.

But even after yesterday's bounce, it was a week that took us back to the panic of October 2008. Stock prices fell 6.6 per cent, wiping $90 billion off the market's value. The dollar plunged 7.3 per cent against the US dollar, and only slightly less on the Reserve Bank's broader index.

Analysts said the Aussie could drop below US80¢ next week if the market retreat continued but its long-term prospects were positive.

''We still think it can head lower from here,'' said Westpac currency strategist Jonathan Cavenagh. ''We think it can head into the 70s.''

Yesterday's rally was fuelled by a market rumour that the Reserve Bank was buying the currency. But the Reserve refused to confirm or deny this, and some suggested it was a correction after the rapid sell-off of recent days. But as analysts tried to make sense of it all, opinions differed not only on where the market will go next, but on what is driving the global retreat of investors away from stocks and risk and into the safety of bonds and the US dollar.

Trillions of dollars have been pulled out of stock markets the world over. Wall Street's benchmark index, the S&P500, fell 7.4 per cent in the past week. In Britain, the FTSE index was down 6.6 per cent, the same as Australia's, while Japan's Nikkei index fell 4.1 per cent.

Shadow treasurer Joe Hockey yesterday blamed the plunge partly on the government's proposed resource rent tax on mining. But Prime Minister Kevin Rudd emphasised the global falls, attributing them to ''a genuine crisis of confidence in Europe''.


In their gloom, the markets have ignored very strong growth figures and forecasts from Asia and the US. China's 12 per cent growth in the year to March has now been topped by Singapore (15.5 per cent) and Taiwan (13.3 per cent). In the US, the Fed is forecasting growth this year to be in the range of 3.2 to 3.7 per cent.

The 11 per cent plunge in the Australian dollar from its peak of US93.41¢ in mid-April will be good for the slow lane of our two-speed economy. For local manufacturers, tourism operators and farmers, it makes exporting more viable and profitable.

But imports will become more expensive, at least for the middlemen, and anyone travelling overseas will need more money.

The proposed resources tax appears to have been at most a marginal influence. The plunge in Australian stock prices over the past month has been similar to the fall in stock prices in the US.

Source: The Age

http://www.smh.com.au/business/rebound-staves-off-the-gfc-mark-ii-20100521-w231.html

Wednesday 11 March 2009

Australia Retail Sales Growth to Slump on Job Cuts, Access Says

Australia Retail Sales Growth to Slump on Job Cuts, Access Says
Share Email Print A A A
By Jacob Greber

March 11 (Bloomberg) -- Australian retail sales growth will slump from the middle of this year as rising unemployment offsets the positive impact from government cash handouts to workers, research company Access Economics said.
Retail sales growth, adjusted to remove the effect of inflation, will slow to 0.2 percent in the 12 months through June 2010 from 0.8 percent in fiscal 2009, Access Director David Rumbens said in a report released in Canberra today.
Prime Minister Kevin Rudd’s government will this month begin distributing A$11 billion ($7 billion) in cash to families and workers to stoke household spending that accounts for more than half the economy. Gross domestic product unexpectedly shrank in the fourth quarter for the first time in eight years as consumers spent less at retailers including David Jones Ltd.
“Retailers face a tough road ahead,” Rumbens said. “The economic backdrop continues to get uglier, so these measures are only likely to result in real retail spending treading water in the first half of 2009.”
Access estimates the cash handouts will increase total consumer spending by A$500 million in the current quarter, and A$1.6 billion in the three months through June.
“The boost to consumer spending which will result, however, will be against a backdrop of a significant loss of labor income and further asset price falls in 2009,” the report said. “The real pain on profits and on jobs is just around the corner.”
Jobs advertised in newspapers and on the Internet tumbled by a record 10.4 percent in February and 39.8 percent from a year earlier, according to an Australia & New Zealand Banking Group Ltd. report released in Melbourne yesterday.

Jobless Rate
Employers probably cut 20,000 jobs last month and the unemployment rate rose to 5 percent from 4.8 percent in January, according to a Bloomberg survey of economists. Jobs figures will be released on March 12.
Access predicts the jobless rate will peak at around 7.5 percent in mid 2010.
“A retail recovery may have to wait until fiscal 2011,” Rumbens said. “And watch out for housing prices,” which fell 3.3 percent last year. “If they were to take a major tumble, then the outlook for retailers would be notably worse.”
Companies including BHP Billiton Ltd., the world’s biggest miner, and manufacturer Pacific Brands Ltd., are firing workers after the economy shrank 0.5 percent in the fourth quarter from the previous three months as exports slumped.
To boost sales at retailers such as David Jones, Australia’s second-biggest department store chain, the government distributed A$8.7 billion in cash grants to families and pensioners in December. Of that, about 25 percent was spent, Access said.

Retail Sales
Retail sales jumped 3.8 percent in December, the most in eight years, and advanced 0.2 percent in January, according Bureau of Statistics figures.
Without the government’s December cash boost, retail sales that month would probably have stalled, Rumbens said in today’s report. Households will probably spend around 25 percent of the next round of handouts and use the rest to pay off debt or increase savings, he said.
“The outlook for retail in 2009 will be directly affected by the amount of deleveraging that households decide is prudent, as they attempt to build a buffer against uncertainty,”
Rumbens said.
“This means that consumer caution -- paying down debt and saving more -- will compound the effects of lost labor income as the unemployment rate rises.”
Retailers will respond to weakening sales growth by firing workers, renegotiating property rents, cutting stock and working to maintain cash flow,
today’s report said.
To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net Last Updated: March 10, 2009 09:01 EDT

http://www.bloomberg.com/apps/news?pid=20601081&sid=agFpM3i3E92c&refer=australia

Tuesday 3 February 2009

Australia faces worse crisis than America

Australia faces worse crisis than America

By Ambrose Evans-Pritchard, International Business EditorLast Updated: 3:24PM BST 22 Sep 2008
Comments 51 Comment on this article

Many fear the economic party in Australia will end badly
The world's financial storm has swept through Australia and New Zealand this week amid mounting signs of contagion across the Pacific region.
Financial shares were pummelled in Sydney on Tuesday after investor flight forced National Australia Bank (NAB) to slash a £400m bond sale by two thirds. The retreat comes days after the Melbourne lender shocked the markets by announcing a 90pc write-down on its £550m holdings of US mortgage debt, an admission that it AAA-rated securities are virtually worthless. In New Zealand, Guardian Trust said it was suspending withdrawals from its mortgage fund owing to "liquidity difficulties in the market".

Global economy is at a danger point
More Ambrose Evans-Pritchard

Hanover Finance - the country' third biggest operator - last week froze repayments to investors. The company said its "industry model has collapsed" as the housing market goes into a nose dive. Some 23 finance companies have gone bankrupt in New Zealand over the last year.
It is now clear that the Antipodes are tipping into a serious downturn. Australia's NAB business confidence index fell to its lowest level in seventeen years in June. New Zealand's central bank began to cut interest rates last week on fears that the economy may have contracted in the second quarter, and is now entering recession. Housing starts slumped 20pc in June to the lowest since 1986.
Gabriel Stein, from Lombard Street Research, said Australia could prove vulnerable once the global commodity cycle turns down. It has racked up a current account deficit of 6.2pc of GDP despite enjoying a coal, wheat, and metals boom, effectively spending its resources bonanza in advance. Household debt has reached 177pc of GDP, almost a world record.
"It is amazing that in the midst of the biggest commodity boom ever seen they have still been unable to get a current account surplus. They have been living beyond their means for 10 years. What worries me is that productivity growth has been very low: they have coasting after their reforms in the 1990s," he said.
Australia's Reserve Bank has had to grapple with vast inflows of Asian capital, especially Japanese money fleeing near zero rates at home. Short of imposing currency controls, it would have been almost impossible to stop the inflows.
"The easy money went straight into real estate," said Hans Redeker, currency chief at BNP Paribas.
"Australia will now have to generate 4pc of GDP to meet payments to foreign holders of its assets," he said. This is twice as high as the burden faced by the US.
Both the Australian and New Zealand dollars have fallen hard in recent days and now appear to be breaking down through key technical support against major currencies, including the US dollar. "The Aussie is going down, big time," said Mr Redeker.
The picture is darkening across the Pacific Rim. The Bank of Japan's deputy governor, Kiyohiko Nishimura, said its economy may now be falling into a "technical recession". Household income dropped 2.1pc in June compared to a year earlier and manufacturers are the gloomiest since the deflation crunch in 2003.
The decision by National Australia Bank to make drastic provisions on its US mortgage debt could have ramifications in the US itself. It opted for a 100pc write-off on a clutch of "senior strips" of collateralized debt obligations (CDO) worth £450m - even though they were all rated AAA. No US bank has admitted to such fearsome loss rates.

http://www.telegraph.co.uk/finance/newsbysector/banksandfinance/2794032/Australia-faces-worse-crisis-than-America.html

Australia steps up recession fight with new stimulus plan and interest rate cut

Australia steps up recession fight with new stimulus plan and interest rate cut
The Australian government has unveiled a second multi-billion dollar stimulus package that it hopes will lift the country out of a deepening slowdown and protect-against a full-blown recession.

By Bonnie Malkin in Sydney
Last Updated: 8:37AM GMT 03 Feb 2009

Kevin Rudd, the prime minister, announced the $42bn plan just hours before the country's central bank, citing the grimmest global outlook in many years, cut interest rates by 1 per cent to 3.25 per cent - its lowest level in 45 years.
The stimulus package, which includes $28bn for infrastructure projects and school improvements, will send the budget into the red for the first time in nearly a decade.
Mr Rudd's government is mirroring the action of most across the world as politicians increase their collective efforts to prevent what's already a deep and global downturn getting worse.
The package comes on top of one launched late last year worth A$10.4 billion ($7.4 billion) and underscores the threat to Australia's resources-based economy, which has shuddered to a near halt since the worldwide financial turmoil began.
Many analysts believe the economy will enter a recession in the next quarter and not start to show signs of recovery until the end of the year. Mass job losses are expected, especially in the vulnerable mining sector.
"The combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionaru forces coming from abroad, " Glenn Stevens, the Governor of Australia's central bank said in explaining the decision to lower the key interest rate to 3.25pc.
The news prompted the Australian dollar to rise against the US dolar and saw the benchmark S&P/ASX 200 Index clim almost 1pc to 3522.6.
Those gains were seem across Asian stock markets as news of Australia's new measures were added to by Japanese plans to buy shares held by Japanese banks. In Tokyo, the Nikkei 225 was up 2.3pc on the prospect that the Bank of Japan would help Japanese banks improve the state of their balance sheets. It said it would purchase up to one trillion yen worth of stocks through April 2010.
The Australian initiatives, spread over four years, include building thousands of new houses and school rooms, and environmentally friendly measures such as providing householders with free home roof insulation. It also features cash bonuses to low and middle-income earners that the government hope will be ploughed back into the economy, rather than saved.
In a move aimed at getting Australians to spend some money, more than half Australia's population of 21 million will be eligible for A$950 ($600) tax bonuses or grants. The spending will plunge the annual budget into a A$22.5 billion ($14.2 billion) deficit — 1.9 percent of gross domestic product — for the current fiscal year ending June 30, the prime minister said.
"Nobody likes being in deficit and I don't like being in deficit at all," Mr Rudd said. "This is not a question of choice. This is what we are required to do."

http://www.telegraph.co.uk/finance/markets/4443093/Australia-steps-up-recession-fight-with-new-stimulus-plan-and-interest-rate-cut.html