Tag Archives: wholesale funding guarantee

RBA & Treasury Coverup – Data Culled At Behest Of Banks

6 Dec

Being the first Tuesday of the month, there’ll be lots of attention on the Reserve Bank today, with many hoping for another cut in the official interest rate in time for Christmas.

So I thought that today, we might take a closer look at the RBA too.

Remember that critical joined-at-the-hip relationship between our Big Four banks, and the government’s balance sheet, that your humble blogger has been banging on about lately?

The relationship that means our government must get its budget back in shape, else its guarantees that are the only thing propping up our zombie banks will lose credibility with the ratings agencies?

Michael West at The Age has been looking at those government guarantees too. His investigation has dug a little deeper into the dark heart of our government-banker kleptocracy (my emphasis added):

Public information turns confidential – RBA culls data

The Reserve Bank of Australia and federal Treasury have been systematically purging public information from their databases at the request of the big banks.

During the course of an investigation into the wholesale funding guarantee, BusinessDay found large swathes of information relating to the use of the guarantee had been expunged from the http://www.guaranteescheme.gov.au website.

This culling of public data follows revelations here last year that the corporate regulator, the Australian Securities & Investments Commission (ASIC) had been deleting evidence of the waivers it had provided to liquidators.

Commitment to transparency?

Now the RBA and Treasury appear to have made an even greater mockery of the government’s “commitment to transparency and accountability”. The funding guarantee scheme is an unprecedented concession for the banks – they are underpinned by the taxpayer and, thanks to sovereign largesse, cannot go bust.

Nonetheless, almost all detail relating to more than $100 billion in taxpayer-guaranteed funding has vanished. Only the details of current guarantees survive.

We can only surmise that both the government and the banks are trying to pretend there was never any corporate welfare in the first place. For the banks’ part, it is harder to justify $10 million executive salaries for running a taxpayer-guaranteed institution.

And for the government’s part, the censorship can only be put down to an obsequious backpedalling on previous public commitments in order to appease the powerful banks.

Unconvincingly trying to rationalise their role in the purge, Treasury responded that public information about sovereign support for the banks had suddenly become confidential.

“Further data on liabilities issued under the Scheme by individual participating institutions is not provided on the Guarantee Scheme website for reasons of confidentiality,” a spokesman told BusinessDay.

It was the sort of line which would have made Sir Humphrey Appleby proud.

With Europe in disarray, and the impending prospect of further taxpayer support for the banks – the RBA has recently foreshadowed relaxing the rules on what assets banks can swap for RBA cash – this is hardly the time for there to be any question over the integrity of public institutions and their information.

[click the link to read the entire article, including how the RBA and Treasury tried to cover-up in response to Mr West’s investigations]

None of this should come as any surprise to regular readers of barnabyisright.com.

There are already very big questions over the “integrity” of our public institutions.

As we saw in Funding For Policy Scandal – Australia Is A Kleptocracy, our very system of government means that our political parties depend on bank loans to fund their election campaigns.

Why?

It is because the parties do not receive their multi-million dollar handouts from the public trough – a distribution which is based on % of the popular vote – until after the election, when the actual number of votes received by each party is confirmed.

So, they have to go hat-in-hand to the banks, begging for loans, in order to mount their campaigns in the first place.

If that is not a relationship of dependency that is absolutely ripe for corruption, then I don’t know what is.

There really is “An Unholy Alliance Of Politicians And Bankers Versus Ordinary People”

Our “Lehman Moment” Near – S&P Downgrades Banks

4 Dec

Just four days ago, your humble blogger noted that our mainstream news media, financial commentariat, and blogosphere, have (again) overlooked the key issue, in their reporting of Treasurer Swan’s MYEFO budget update.

Once again, they have all overlooked the critical economic risk; the joined-at-the-hip relationship between our Big Four banks, and our government’s financial position, as perceived by the major credit ratings agencies.

To wit, back in May this year Moody’s Ratings agency essentially declared our Big Four banks are Too Big To Fail. And in downgrading the Big Four’s credit ratings, Moody’s tacitly warned the government that it must maintain the implicit and explicit government (taxpayer) guarantees propping up the Big Four, else Moody’s will cut their ratings by another 2 notches.

By inference, this means that Moody’s was also warning the government that it must achieve and maintain a pristine government sector balance sheet, in order to support the plausibility of its guarantees for our Ponzi banking system.

If the government cannot reverse the direction of its ever-rising debt trajectory, and demonstrate a plausible path back to achieving an annual budget surplus (in order to start paying off the gross debt), at some point in the not-too-distant future their failure to manage the debt will be taken as a sign that our government’s guarantees of our banking system are less than reliable.

Wayne’s (unreported) MYEFO prediction of a 57% blowout in net public debt this year alone, will only hasten the arrival of that day.

As will his blowing through our third increased debt ceiling in just 3 years, by around mid-2012.

Commonwealth Government Securities On Issue | Source: Australian Office of Financial Management (AOFM)

Inevitably, our banks will have their credit ratings cut further.

They will find it increasingly difficult to attract funding from international money markets, upon whom the banks are dependent for around 40% of their wholesale funding. (Indeed, as we saw on Wednesday, the yield spread on Aussie banks’ bonds compared to non-financial Aussie corporate bonds, has just hit an all-time high).

Funding costs for the banks will rise.

Interest rates for Australian borrowers debt slaves will rise. (Or at the very least, RBA interest rate cuts will not be passed on).

Availability of loans to businesses will fall even further, choking the economy.

Unemployment will rise.

Bad loans (defaults) will increase.

Our housing bubble’s gentle 10-month price deflation, will accelerate.

Our economy will crash.

Our banks will collapse like the Ponzi house of cards that they are.

And the all-time record debt-soaked government taxpayer …

Click to enlarge

… will be obliged to bail out the banks, as per the Government Guarantees.

Now, we have a further red flag that my Missing The Key Economic Point For Dummies blog was right.

From The Australian (emphasis added):

Australia’s major banks are confident the first ratings downgrade by Standard & Poor’s in two decades will not have a major impact on their funding costs, despite the ongoing volatility created by the European sovereign debt crisis.

The share prices of the major banks — Commonwealth Bank, ANZ, Westpac and National Australia Bank — rose by 1.5-2 per cent, despite the one-notch ratings downgrade from AA to AA- as the overall market rose 1.4 per cent for a sparkling weekly gain of 7.6 per cent…

… The banks’ ratings were last cut in the early 1990s as the Australian economy struggled with recession.

S&P defended the ratings downgrades, which it attributed to Australian banks’ heavy reliance on wholesale funding markets.

And from ABC News (emphasis added):

BBY banking analyst Brett Le Messurier says the downgrade is not too serious but could lead to higher borrowing costs in the long term.

Mr Le Messurier says the big four banks still have plenty of liquidity to help them “ride out the current turmoil in Europe for some time”.

“In and of itself it doesn’t matter that much, but if another one follows then they get into the “A” category,” Mr Le Messurier said.

“And that is going to lead to increased wholesale funding costs over and above what’s resulted from the current European crisis and therefore that will ultimately feed through to consumers.”

And from the Wall Street Journal (emphasis added):

When it comes to Australia’s banks, don’t listen to the spin.

Late last night, Standard & Poor’s cut its rating on all of the big 4 — Australia & New Zealand Banking Group, Commonwealth Bank of Australia, Westpac and National Australia Bank — warning about rising costs and a continued increase in wholesale funding costs. Given Australia’s banks predominantly fund themselves offshore, the ongoing European sovereign debt crisis has raised concerns about the contagion possibilities…

… The moves come about six months after Moody’s did almost exactly the same thing and predictably, just like then, each of the banks have come out today to defend their balance sheets and businesses.

But while ratings agencies certainly don’t carry the clout they used to, make no mistake, there are a stream of issues for Australia’s banks.

For one, a credit facility from the Reserve Bank of Australia, or RBA, established to help banks satisfy new global banking rules, known as Basel III, are certain to lower each of the banks’ risk-taking possibilities and profits.

But actions speak louder than words and when the RBA cut its key cash rate a month ago, NAB refused to pass on the favor in full. If Europe gets worse, and the RBA cuts a few more times, all those banks that today are talking about their strong balance sheets will change their refrain when they decide to hold back on passing those cuts on.

The NZ Herald’s Liam Dann debunks the spin, and explains why the banks’ attempt to downplay the ratings cuts masks an important truth (emphasis added):

You can say all you like about yesterday’s banking downgrade being “anticipated”, “reflecting methodology changes” and not “impacting on consumers” – but down is still down. It’s the wrong direction.

So despite the spin suggesting this is no big deal, the big Australasian banks should hopefully be paying close attention to the Standard & Poors review which saw their ratings cut from AA to AA-…

… taking a step back from the technical stuff, it’s important to recognise that this methodology change is not some just arbitrary fiddling with numbers.

It’s grounded in the very real increase in risk to lenders that has occurred since the global financial crisis struck.

The changes stem from the failure of the ratings agencies to identify that crisis in 2007 and 2008.

So, in some respects, this downgrade represents the credit agencies doing their job properly – finally.

The big shift in the way S&P now looks at banking risk is that it has weighted its focus away from the cyclical ups and downs which are reflected in an institution’s quarterly financial performance and towards the underlying structural risks of a region’s banking sector.

So now, S&P is analysing first the structural risks in the Australasian banking system as a starting point, and then assessing the relative position of each bank’s performance within that context.

And finally, from Ireland’s The Journal (emphasis added):

S&P said the decision was based on the cost posed by sourcing cash from overseas markets and the country’s foreign debt.

Following the crash of Lehman Brothers in 2008, which S&P failed to foresee, the agency revised its rating criteria – and it is in the context of these new considerations that the banks were downgraded, reports The Australian.

Meanwhile, rival rating agency Moody’s said it would keep the banks on their AA rating and retain their outlook as positive.

Experts have warned that a continuing European debt crisis could expose the banks to a further downgrade.

As noted in Wednesday’s blog, our Net Foreign Debt is yet another key factor that our politicians (on both “sides”) and lapdog media studiously avoid focussing any attention on. Why? According to the latest RBA data, our Net Foreign Debt at June 2011 was a whopping $675 billion. More than 50% of GDP. So naturally, noone in positions of power want to mention it, even though it is a very serious structural problem, and one that is now fundamental to triggering negative consequences such as this S&P rating downgrade.

Break out the popcorn folks.

It has begun.

As usual … Barnaby is right:

“If you do not manage debt, debt manages you” – Feb 2010

Missing The Key Economic Point, For Dummies

30 Nov

It is rather bemusing to browse around the economic commentaries on Wayne’s MYEFO (Mid Year Economic and Fiscal Outlook) announced yesterday. In particular, the commentaries from those with a leftist bent.

By and large, from these folk we hear the same refrain as that parrotted on down the line from Treasury via their talking head (Wayne Swan). To wit, “strongest economy in the developed world”, “envy of the developed world”, “lower debt-to-GDP than other advanced economies”, “nothing to see here, move along folks”.

Here’s some good examples that caught my eye:

Secondly, let’s tackle the Opposition canard – gleefully recycled by some media outlets – that somehow we are drowning in debt. It doesn’t take much – like five minutes on the Internet – to show that total government liabilities at around around 22 per cent of GDP are the lowest in the OECD and compare extremely favourably to just about every other developed economy.

It appears rather obvious from The Failed Estate’s analysis, that he did indeed spend “like 5 minutes on the internet” researching his momentous piece of groupthink.

And then there was New Matilda’s Ben Eltham. See if you can spot the drive-a-truck-through-it hole in his effusion (hint, emphasis added):

Step back from all the sound and fury about budget surpluses and the European debt crisis for a moment, and have an unbiased look at the latest Treasury figures on the health of Australia’s economy.

Unemployment is expected to peak at 5.5 per cent next year, and remain at the level into 2013. Inflation will be 3.25 per cent. Wages will grow at 4 per cent. Consumer spending will grow at 3 per cent, and the economy as a whole at 3.25 per cent.

These are figures that would make finance ministers in Europe weep. The Australian economy is growing. We’re adding jobs and keeping unemployment low, consumers are still spending, and inflation is modest. And yes, the budget will return to surplus.

Note to Mr Eltham: These are “estimates” and “projections”. Not outcomes. “Expected” does not equal “will”.

Indeed, as regular readers know, both the budget and MYEFO are all about “estimates” and “projections”.  And the Treasury department has a sterling record of abject failure when it comes to getting within a bulls roar of accurately predicting the final budget outcomes. Indeed, in less than 6 months, their “truly extraordinary” growth forecasts underpinning the May 2011 budget “estimates” and “projections”, are already shot to hell.

But our purpose today, dear reader, is not to dissect the ignorant parrotry of “leftist” journalists and bloggers.

Or “rightists”, for that matter.

Our purpose is to identify the key economic point that they are all missing.

One that even respected mainstream economic commentators like Access Economics’ Chris Richardson, here implying that it may not be wise for the government to be cutting spending at this time, have universally overlooked:

Deloitte Access Economics director Chris Richardson said the government planned to cut spending when the Reserve Bank of Australia (RBA) had cut its cash rate in early November.

The RBA cut the cash rate from 4.75 per cent to 4.5 per cent to provide some stimulus for a slowing economy.

“What the government is doing here is actually taking money back out again solely to get a surplus next year,” Mr Richardson told ABC Radio on Tuesday.

“It is not clear that it is smart to have the Reserve Bank tipping money but the government then taking it back out when the outlook especially with Europe is somewhat fraught.”

Let’s help out Messr’s Denmore, Eltham, and Richardson, with a brief guide on how to miss the key economic point.

For dummies:

1. Focus on the Federal government public debt figure.

2. Emphasise comparison of Federal government public debt-to-GDP versus other “developed” countries, praise Labor government for comparatively “low debt-to-GDP”.

3. Downplay importance of return to balanced annual budget / budget surplus. Cite 2. as primary justification.

4. Belittle any who express concern over ever rising government debt trajectory. Cite 2. as primary justification.

Commonwealth Government Securities On Issue | Source: Australian Office of Financial Management (AOFM)

5. Ignore the fact that while Federal Government public debt is “only” relatively small, our total Net Foreign Debt at June 2011 was almost $675 Billion, or over 50% of GDP (RBA Statistics, H5).

6. Ignore the fact that our banking system (thus, economy) relies on international money markets for some 40% of its “wholesale funding”.

7. Ignore the fact that in May 2011, Moody’s downgraded our Big Four banks’ credit ratings, cited their wholesale funding dependence as a key concern, and tacitly threatened the government that without the government’s explicit and implicit Guarantees propping them up, our Big Four banks would have their credit ratings slashed by at least two more ‘notches’.

8. Ignore the fact that in late June 2011, Fitch Ratings warned that Australia’s banks are amongst the most vulnerable in the world to the EU debt crisis, due to their reliance on wholesale funding from international money markets.

9. Ignore the fact that the spread on bond yields for Australia’s Big Four banks (versus non-financial institutions) have just hit record highs (from Bloomberg via SMH):

 Yields on bonds of Australian banks reached a record high relative to debt of the nation’s nonfinancial borrowers as Europe’s debt crisis threatens to freeze credit markets

Lenders including Commonwealth Bank, Westpac, ANZ and National Australia Bank Ltd., may need to sell about $144 billion of bonds in the 12 months ended June, 2012, according to a July research report from Deutsche Bank …

Trading conditions in the euro area have deteriorated this month as the region’s sovereign debt crisis deepens. Germany failed to get bids for 35 per cent of the 10-year bonds offered for sale on November 23 and traders were left seeking prices in the aftermath of a Spanish debt sale on November 17.

10. Ignore the fact that due to the very real vulnerability of our banking system, it is near-inevitable that the government will need to reinstate the Government (taxpayer) Wholesale Funding Guarantee to prop up our Too Big To Fail banks.

11. Ignore the fact that the government’s present “low” public debt comparison versus other countries is largely rendered a moot point, because the credit ratings agencies have already effectively served notice that they will have a lower tolerance for anything less than pristine government finances – and thus, a genuinely convincing case for return to surplus – due to the compulsion upon the Australian Government to (continue to) prop up a highly vulnerable banking system.

12. Blithely skip merrily through cherry-strewn intellectual fields, hand-in-hand with fellow groupthinkers, picking fruit and singing la la la la, wilfully ignoring the reality that (in the words of Senator Joyce) …

… “If you do not manage debt, debt manages you.”

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