Precious Aussie banks

Only a week after a series of headlines celebrating the renaissance of Australian banking with the major banks' high share valuations it is interesting to see signs that all is not well.

Firstly a downgrade from Moody's on certain subordinated debt:

GLOBAL credit ratings agency Moody's has followed through with a threat to downgrade billions of dollars in subordinated debt issued by Australian banks due to "bail in" risks, as global regulators take a harder line on bank bail-outs. 

After kicking off a review in June, Moody's yesterday downgraded the subordinated debt ratings and some junior subordinated debt ratings for Basel II-compliant securities of eight Australian banks.... 

The ratings of the big four banks -- the Commonwealth, Westpac, National Australia Bank and ANZ -- were lowered by two notches, while the regional banks -- Bank of Queensland, Bendigo and Adelaide Bank and Suncorp -- were cut by one notch.(here)

And meanwhile markets are pricing Aussie banks as more risky as well:

...over the past month, Australian bank CDS prices have jumped again and fast. As of Friday prices were back above 100 at 108. This has transpired within the context of the sudden jump in yields in everything from US Treasuries to Brazilian junk bonds. But it should be noted that Australian bank CDS prices have risen much further than those of comparable major banks in other developed nations, almost 50% in a month. This is a  legacy of our particular dependence upon offshore wholesale funding such a leap is in some measure also a reflection of the sudden realisation in global markets that Australia is not the miracle economy it thought it was, CDS prices being the reverse of what’s being expressed in the falling Australian dollar.(here)

Arguably two signs of the same coin with deteriorating conditions for Aussie banking? 

The $17 million kitchen... not Chinese...

Such could be a headline to do with the exit of Julia Gillard, who of late had been playing her gender cards on her sleeve, while readers from the UK and other less honest jurisdictions might expect a headline about exposed extravagance by the former prime minister.  Such would be not on the mark, but not far off point.

The Gillard exit has caused an uproar, the best manifestation of which could be the rant in the Senate by upper house member Michaelia Cash, very much in the mould of Australian rough and tumble politics.

To be sure it is a dramatic story, with Rudd facing a looming challenge to restore order and fight a rapid election campaign.  But interestingly there is quite a silence in the media on a far greater issue.  In a sense it doesn't matter who is in government, Australia faces a tsunami from China and in two ways.  First from the resources pull back.  Second from the shockwaves if the Chinese economy collapses.

On the first point there was a good overview piece in the FT which looked at Rudd's challenge and the scale of the slowdown for Australia's golden goose (resource projects worth $150 billion cancelled etc)  But more on that kitchen - a nice focal point:

Sitting in a warehouse outside Brisbane airport in Queensland is a kitchen designed to feed up to 2,000 mine workers a day. But it was never delivered to BHP Billiton, the world’s biggest mining company, because the project it was destined for was put on hold. The kitchen is now on the market for A$17m, local media say.

On the second point some pretty direct words of warning:

The risks are growing that China, which underwrites the Australian economy, will succumb to a financial crisis. This has not sunk in for Australian policymakers, perhaps because the implications are just too large, but it is the view that is forming among a large number of investors and economists who watch the data and investigate ground-level conditions closely.
There are huge uncertainties but, at face value, it looks like China is in the midst of one of history's great credit expansions – bigger than Japan's at the height of its bubble – and all that money is no longer generating growth in gross domestic product. The accelerator is pressed to the floor, the tank is getting low but the wheels are not getting traction like they used to. (here)

The above article refers to expert Victor Shih of Northwestern University.  A video of him explaining just how many trillions of bad debt are locked up in Chinese banks is here.

Similarly from William Pesek:

Australia has been called many things: Oz, the land Down Under, the lucky country. But the equivalent of a collateralised-debt obligation?
Canberra can't be happy to hear its AAA-rated economy likened to one of the reviled investment vehicles that blew up amid the 2008 global crisis. Yet the comparison is being made by some economists, who see the asset underlying Australia - demand from China - beginning to evaporate.
No country is more vulnerable to the much-dreaded slowdown in China than resource-rich Australia. The mining boom that fuelled nearly all of its recent growth is nearing a cliff of economic risk.
“Australia is a leveraged time bomb waiting to blow,” says Albert Edwards, Societe Generale's London-based global strategist. “It is not just a CDO, but a CDO squared. All we have in Australia is, at its simplest, a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China.”
AdvertisementThere's a bit of hyperbole in this view. But highly-advanced Australia is about to pay the price for growing so addicted to a developing nation. Exporting natural resources led to the neglect and atrophying of other critical sectors.

Oh dear.  Where to from here?

  

Australia is a basket case!

Well not quite...but a toy kangaroo is certainly in the frame - for the royal baby soon to be born to Duchess of Cambridge Kate Middleton (and Prince William of England)!

For those unaware of Australia's odd constitutional arrangements, the head of state currently is English Queen Elizabeth II and through their shared history Australians maintain a strong connection to events in old Blighty.

That doesn't explain the whole stunt though.  Due to massive party infighting ahead of the September general election, Julia Gillard is trying all manner of things to regain the initiative and garner lost popularity, amidst infighting with former also-ran Kevin Rudd.  One such step was to announce a return to her traditional side by commencing a knitting of a soft toy for the English royal baby (while having only engaged in a sexist tirade at fellow male parliamentarians the week before).  Quite daft really.

But there is a serious point here - the political sideshow is distracting from serious economic headwinds.  As Warwick McKibben notes at MacroBusiness, problems lie ahead:

The biggest risk Australia faces is the political uncertainty which is undermining consumer and business confidence.
It won’t be until the end of 2013 that there is a clear indication of the direction of government policy. The good news is that the portfolio shift into Australian assets has probably passed, partly due to this political uncertainty. A weaker exchange rate is to be expected. This will be a two-edged sword. It will help with the profitability of trade-exposed companies but it will also add to imported goods inflation which will likely push inflation outside the RBA comfort zone.

The recession that shall remain nameless...

There is a lot of press about Wayne Swan and cronies trying to shut down any talk of recession...

The deputy prime minister of Australia, Wayne Swan attacked Goldman Sachs Group Inc. (NYSE:GS) analyst for creating overly pessimistic view of the Australian economy. Goldman Sachs Group Inc. (NYSE:GS) economist Tim Toohey said in a research report (embedded below) yesterday that the resource-rich economy has a 20 percent chance of falling into a recession. Australia has posted uninterrupted economic growth for more than 21 years.(here).

Meanwhile even without the R-word the signs are there for all to see.  And when bankers start downsizing...

BOSSES of some of Australia's largest investment banks are overhauling their real estate operations, with most of the top groups having axed staff and at least one considering a move deeper into unlisted wholesale real estate funding....Almost all the big banks have let go of at least one senior investment banker from their real estate teams in the past 18 months, including UBS, JPMorgan, Goldman Sachs, Deutsche and Merrill Lynch (here).  

And over to the employment numbers:

Economists are revising up their unemployment rate forecasts for this year, ahead of the release of the May jobs figures tomorrow....Analysts expect the unemployment rate to tick up by 0.1 per cent to to 5.6 per cent in May, with 10,000 jobs removed from the economy...

‘‘[The economy’s] not growing fast enough in a fundamental sense to generate enough jobs to keep the unemployment rate level,’’ NAB chief economist Alan Oster said (here). 

Aussie dollar poison

Poor South Australia.  Last year it lost the Olympic Dam megaproject and now the Economist points out that Holden (the local GM subsidiary) is looking to cut jobs in the state.  Not only that, the magazine lists whole industries which are being struck off as uncompetitive thanks to the record high Aussie dollar:

....Holden, a subsidiary of General Motors and one of Australia’s biggest carmakers, cut 500 jobs, most of them in Adelaide, the state capital. The job cuts and Australia’s trade boom with China have a common thread: Australia’s mighty dollar. Chinese trade not only helped Australia survive the global downturn. It has also boosted the currency’s strength, and made it harder for manufacturers to find markets for their exports. The problem is unevenly distributed around the country. South Australia has suffered the greatest pain: in no other state does manufacturing account for such a big share of the economy....
.....Australia’s dollar recently soared to its highest level in nearly 28 years, on a trade-weighted basis.... The currency’s rise [has] meant that making things in Australia is almost three-fifths dearer than it was ten years ago. It has overwhelmed successive governments’ efforts to steady the carmakers with subsidies. Five years ago, Mitsubishi closed its plant in Adelaide. Australia’s remaining carmakers, Holden, Ford and Toyota, have shed jobs steadily since then. Australians are buying imported cars more cheaply than ever, especially from Japan; their dollar has risen by 26% against the yen since October (here).

As the article notes Julia Gillard is pressing onwards and upwards in engaging with China.  Her own constituents may wish for more efforts directed at home.

Squeezing monetary policy

Nothing unusual in politicians seeking to pull the levers of supposedly independent monetary policy with some public comments and a coming election in mind.  Question is, in the midst of a currency war with central bankers from Japan, Cyprus, Europe, UK and US all feeling the politcal heat to abandon orthodoxy and print, will Julia begin a trend of greater pressure on the RBA?

...Prime Minister Julia Gillard says that the federal government’s ‘‘tight’’ fiscal stance leaves room for the central bank to cut interest rates as manufacturers try to cope with sustained currency strength....
...‘‘Our success as a resources economy, as an economy that’s emerged from the global financial crisis strong, has meant that our Australian dollar has been very high,’’ Ms Gillard said hours after meeting with business leaders advising the government on its 2014 presidency of the Group of 20 nations..... (here)

As has been posted, Garnaut and others have discounted the comfort such statements and assumptions propagate - the Asian mining boom is ending and income and growth will drop but FTAlphaville noted another reason why this is dangerous:

Hot Money

It turns out Australia is being funded by non-conventional sources, with the implication being it is "hot" and can be withdrawn very quickly in a crisis (and quick hot money withdrawal means currency crisis and/or collapse):

...At face value, given the share of foreign companies involved, the analysis implies that around half of the investment during the boom has been funded from offshore. However, the actual use of foreign sources of funds is much higher than that. This is because wherever companies are partly foreign owned, funding from internal sources is equivalent to partial funding from foreign sources. Consequently, since the Australian listed resources sector is around three-quarters foreign owned, the same large proportion of internal funding is attributable to foreign sources.... Taking all this together suggests that around four-fifths of the investment funding has been sourced from offshore (here).

Gerry takes a breather...

Perennial wise man and talisman of Australian retailing has been reported to be enjoying some calm in improved trading conditions after many quarters of tough sales and competition with online sales channels.

....Despite TVs and computers still being the Achilles heel of his retail chain, suffering from continued sharp price deflation and shrinking sales revenue, Harvey Norman was recording better growth from its other departments, such as home appliances, furniture and bedding....Its Australian store network, the bulk of the Harvey Norman retail empire, recorded its first positive sales lift since the fourth quarter of 2011 and the first positive like-for-like quarterly sales growth since the first quarter of 2011....

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But the executive chairman of Harvey Norman, who began working in the retail sector 50 years ago, warned retail conditions remained fragile, creating a tough environment the likes of which he had never seen....''Our sales have been going down, down, year after year,'' Mr Harvey told BusinessDay. ''That has never happened to us before - I've been in business for over 50 years and I have never gone through something like this....(here)

Too right Gerry and more to come unfortunately... 

Home sales slide...

While the mining boom flickers out, Australia's other, real economy has tanked and no the Ozzie dream of the quarter acre block will not save all...

MacroBusiness economist Leith van Onselen said that sales in the detached new homes market were now tracking at their lowest annual level in the 16-year history of the series...."It's the worst February on record," he said....

...Victoria posted the weakest performance by far, with detached home sales dropping 13.7 per cent...."Victoria's detached new homes market is extremely sick," Mr van Onselen said, noting that the problem has been exasperated by the cancellation of the $13,000 first home bonus in July last year....

...The slide has come despite many developers offering steep incentives – including cars, cash rebates and home decorating packages – in bid to entice buyers back into the market.... (here)

More on RBA reticence

It has been noted on this blog that the RBA is clinging to its mining first policy and failing to engage with the rest of the world's central banks as they battle the nascent currency war.  Following its comments seeking to reassure earlier in the week, there has been some decent commentary on Macrobusiness.com.au about comments of the RBA and APRA on the difficult policy reform environment and how out of step the two bodies are with the rest of planet earth.

As noted RBA Governor Stevens decried reform fatigue:

....a point in the financial regulatory sphere where the G20 should be looking for careful and sustained efforts at implementation of the regulatory reforms that have already been broadly agreed, but being wary of adding further reforms to the work program....(here)

Macrobusiness notes the underlying concern could stem from a number of concerns - the amount of reform already, concerns about a change of government with new policies and the capacity of banks to comply more or even "that the RBA is more worried about the approaching mining investment cliff than they are letting on".

All true but this blog has a slightly different view.  Macrobusiness also talk about recent speeches at a meeting of central bankers in London this week, in particular from Fed Chairman Bernanke which it seems he is basically justifying the total debasement of the US Dollar via money printing programs:

....Regarding the effects of monetary easing on exchange rates and exports, I would note that trade-weighted real exchange rates of emerging market economies, with some exceptions, have not changed much from their values shortly before the intensification of the financial crisis in late 2008. Moreover, even if the expansionary policies of the advanced economies were to lead to significant currency appreciation in emerging markets, the resulting drag on their competitiveness would have to be balanced against the positive effects of stronger advanced-economy demand..... (here)

At a time of recurrent flagging demand! It goes on...

...It is true that interest rate differentials associated with differences in national monetary policies can promote cross-border capital flows as investors seek higher returns. But my reading of recent research makes me skeptical that these policy differences are the dominant force behind capital flows to emerging market economies; differences in growth prospects across countries and swings in investor risk sentiment seem to have played a larger role...

If this were true then the record high run of the Australian dollar would be simply down to the country's economic opportunities and not because Australian government bonds pay rates far higher than nearly most of the world!

So there you have it - Macrobusiness interprets this positively and mildly - positively in the sense that the Fed's actions are innovative policies and the actions by the RBA are failure to get with the program. This blog broadly agrees but comes to a different conclusion.  There is a currency war going on the the Fed's policies are especially provocative.  It is not that the RBA is not following - so far the RBA seems to be ignoring the situation completely and hoping it will go away..!  It will not and Australia is vulnerable...

Receivership - coming to a company near you

Recent reports of failed businesses include high-tech Adelaide engineering company Priority Services, Potato company Mondello Farms and Victorian manufacturer the Starmaid Group.

....Priority Engineering Services had been operating in Elizabeth South since 1984 but a downturn in contracts has led to receivers moving in and staff yesterday being made redundant....Receiver Ferrier Hodgson was already talking to parties interested in leasing or buying the company's 10,000sqm site.

What links all of these together apart from general slowdown and industry specific factors?

...It is no secret that ...manufacturers are facing extremely challenging times...Companies are struggling under a high cost, high wage, high currency environment."

If you are confused about how the high currency and other policies could be causing damage to the economy while being proclaimed as good by the Reserve Bank of Australia, then you are not alone - so are we!  In fact we think the RBA is suffering from short sightedness or only looking through one eye

The one eyed central banker

Interesting statements from Deputy RBA governor Phillip Lowe that high AUD has been a boon for Australia.  In classical theory a high currency slows imports and curbs inflation.  But this analysis ignores hot money flows and asset bubbles....

..."Had we not experienced the sizeable appreciation (in the value of the Australian dollar) over recent years, it is highly likely that the economy would have overheated and that we would have had substantially higher inflation and substantially higher interest rates," he told an economics forum in Sydney on Tuesday...

Well possibly, but globally inflation is low and interest rates are at rock bottom and the rest of the world...

...."At the moment though, the available evidence does suggest that lower interest rates are doing their work broadly as expected." (here)

This is a very narrow analysis.  Will Dr Lowe agree with this analysis when the hot money recedes, the currency drops and low interest rates fail to stimulate as is occurring elsewhere?

Another retailer goes bust...

More liquidations to be expected?

Mothercare customers have lost hundreds of dollars worth of gift cards and deposits since the baby clothing retailer was put into voluntary liquidation....

...Mothercare customers have lost hundreds of dollars worth of gift cards and deposits since the baby clothing retailer was put into voluntary liquidation.

The customers, many of whom are expectant mothers, are angry with the retailer, which has refused to honour gift cards or deposits after going into administration six weeks ago... (here)

RBA hacked...

...The Reserve Bank of Australia (RBA) said it had "on occasion been the target of cyber attacks", following a report in an Australian newspaper. (here)

Rotten super

Interesting fraud case involving a self-managed superannuation fund (pension fund) - tip of the iceberg?

...Last week, ASIC asked the Federal Court to appoint liquidators to MOGS as part of its investigation into a self-managed super fund scheme that allegedly misappropriated $4.5m from almost 400 clients around the country....

....Mr Gore, son of the late Mike Gore, who built the Sanctuary Cove resort on the Gold Coast in the 1980s, was listed among BRW's top 200 richest Australians before the global financial crisis. But in April this year, he filed for bankruptcy, citing debts of $282.9m after a string of failed deals, including taking on the Sanctuary Cove project that had bankrupted his father....

...According to ASIC's statement of claim filed to the court and obtained by The Australian, it is alleged that only $455,000 of the $4.75 million raised by ActiveSuper and Royale Capital was used to buy 14 homes in Arizona via companies in the US, the British Virgin Islands and the Cayman Islands....The remainder of the money was allegedly used to create loans for MOGS, a company in which Mrs Gore is a director and which counted Mr Gore as a consultant... (here).

A Gough moment?

"Well may they say god save the surplus, but nothing can save the Prime Minister" was not said by former prime minister Gough Whitlam, but is the message from recent piece in the diplomat:

...Australia may be set for a record 22^nd straight year of economic expansion, but it will not save the federal budget or Prime Minister Julia Gillard’s job. That was the message from the latest economic data along with an election in West [sic] Australia state, where voters handed Gillard’s Labor Party another drubbing....

...while real (after-inflation) GDP met expectations, nominal growth only expanded by 0.5 percent in the quarter and 2 percent from a year earlier – well below the government’s previous forecasts....“It is unusual for nominal GDP to grow this slowly, and this continues to drag on the government’s revenue collections,” Swan admitted....(here)

More on the RBA backstop

Excellent piece from Chris Joyce on the RBA Backstop.  Question is does it show the full extent of the weakness of the Australian banks in their descent into crisis or is this the pre-emptive strike to hit out at the markets?  Yes Aussie banks are vulnerable coming off good times due to their reliance on wholesale funding, but will the RBA's actions be enough?

...In a globally unique policy, the Reserve Bank of Australia will supply banks with a permanent bailout facility worth up to $380 billion by 2015....The policy has been designed by the RBA to help banks satisfy stringent new liquidity tests which simulate “acute stress scenarios” that deny banks funding for 30 days under the post-GFC rules, Basel III....Local regulators argue that insufficient liquid assets such as government bonds meant they had no choice but to give the banks a new taxpayer-backed “line of credit” that could be tapped at a cost just above the RBA’s cash rate. Smaller building societies and credit unions are not subject to the liquidity tests and will not, therefore, have access to the bail-out fund....

...The Australian Financial Review has been told that the Swiss-based Basel Committee, which is the supra-national regulator of bank regulators, was initially opposed to what is known as the “Australian solution”. Only one other country, South Africa, has emulated it, although Singa­pore is evaluating it....

...With actual leverage of roughly 26.5 times, a 4 per cent fall in asset values would, on average, wipe out the major banks’ capital. While the banks are regarded as being durable institutions, it does not take much duress to invoke solvency threats. The Basel Committee’s second finding was that banks should hold more liquidity in the form of high-quality liquid assets to pay out depositors and wholesale bond holders during times of stress....(here)

ANZ in a bind

Readers may have spotted commentary about ANZ had released results recently which showed it was under greater pressure than some of its rivals (including CBA which managed to scoop up Bankwest for a song).  And not surprisingly come the job cuts...

...Australia & New Zealand Banking Group Ltd. (ANZ), Australia’s third-largest bank by market value, plans to cut about 50 jobs in institutional and international banking as lenders trim costs amid weak credit demand....Australian banks have relied on staff and pay cuts to protect profit as they confront the weakest demand for home lending since 1977. In 2012, ANZ announced plans to shed 1,000 jobs by September of that year as part of Chief Executive OfficerMichael Smith’s efforts to offset slumping loan growth (here)

But in fact all banks are trimming...

...Commonwealth Bank of Australia, the nation’s biggest lender by market value, will freeze base salaries for people making A$150,000 or more in its institutional banking and markets division, an internal memo showed in July....Westpac Banking Corp. (WBC), eliminated more than 500 roles early last year. National Australia Bank Ltd., is scheduled to brief investors on its technology program and its cost management plans on March.13.

Property got hot...

A question of who is resourced when it comes to extra-judicial muscle...

...Fairfax Media has found desperate companies are increasingly hiring self-described ''mediators'' like Ray ''Rugby'' Younan, James ''Big Jim'' Byrnes and Alex ''Little Al'' Taouil to resolve and collect debts....A series of high-profile multimillion-dollar bankruptcies over the last two years has created a domino effect resulting in out-of-pocket sub-contractors employing people with questionable pasts to chase debts for them....

...The Australian Securities and Investments Commission found one in four building companies go bust, the worst figures for any industry, with a total of 1113 insolvencies reported last year. Mr Parker said ''hoons and goons'' have always been in the building game but the economic downturn has made some builders ''do desperate things''. (here)

A splintered backstop for Oz banks

Great piece in AFR analysing the nature of the RBA's commitment to backstop Australia's large banks in case of emergency.  As has been so problematic in Europe, it seems the central bank is on the hook, and early.

...The Reserve Bank of Australia’s unique Committed Liquidity Facility – a little-known, taxpayer-backed “line of credit” to help banks overcome solvency crises – creates as many problems as it is intended to address. And it is not clear officials have thought these through....

...The Australian Prudential Regulation Authority appears to understand this nuance [of solvency]. Officials acknowledge that if a bank needed to draw on the CLF, it would be trading insolvent under the Banking Act in the absence of the taxpayer support, irrespective of whether it had “positive net worth”....The Committed Liquidity Facility opens a Pandora’s box of problems. The most obvious concern is that it inverts the logic of the Basel Committee’s post-GFC policy remedies by entrenching taxpayer loans as a first, rather than last, line of defence against bank collapses. (here)

Real victims in currency wars

While the RBA and the banking industry have been showing off their resilience to the ebbs and flows of currency markets, in the space of the real economy, real businesses are going to the wall. 

Focussing on the iconic sauce maker Rosella this Bloomberg piece said:

....Rosella’s receiver today said it was unable to find a buyer and will shut the saucemaker, leaving 70 workers without a job. The failure -- along with receiverships at book seller Angus & Robertson, founded in 1884, and Allans Music, in business for 16 decades -- illustrate Australia’s lopsided economy. A mining- investment boom is delivering the quickest growth in the developed world even as it masks other weaknesses....

....“It’s disappointing that these Australian icons are either disappearing or being severely diluted and undermined,” said Kumm, who spoke before today’s announcement. His great- grandfather Frederick Cato helped found the company in 1895. “We’re used to seeing those things on our shelves and there’s a sense of belongingness.”....

Bob Gregory, a professor at Australian National University in Canberra and former central-bank board member, predicts joblessness will worsen this year. The investment phase of the mining boom, which has been construction-oriented, will wane and government-budget cutbacks will curb infrastructure projects, hurting workers without college educations, he said....Some blue-collar enclaves in Australian capital cities already have unemployment approaching recession-plagued Spain’s record 26 percent...(here)

Meanwhile for another consumer retail business, footwear there was also bad news:

...SHOE Superstore is the latest retailer to fall into administration as the chief of parent company RCG Corporation warned that some sections of the consumer market were still reeling from the impact of the global financial crisis....RCG put Shoe Superstore, which includes nine stores employing about 50 staff, into the hands of administrators yesterday, less than four years after it acquired the business... (here).