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Monday 28th July 2008 - 9:50 pm
Comments Off on Double bubble trouble:where will it end?

Double bubble trouble:where will it end?

by Alan Thornhill

Wayne Swan and Guy Debelle are, certainly, right.

There is no doubt that Australia does have “a well regulated banking system, capable of withstanding the fallout from…international developments,” as the Treasurer says.

Mr Debelle’s remarks are forceful, too, if a little more technical. But that is to be expected of a Reserve Bank Deputy Governor, who has special responsibility for financial markets.

Debelle surprised no-one, at a credit summit in Sydney yesterday, when he admitted that global credit markets had been “turbulent” over the past year.

But he saw reason for hope, too.

“While there have been areas of dislocation in the Australian credit market, there have also been areas of strength,” he said.

Such as?

Mr Debelle answered that question, too.

“The process of re-intermediation has seen strong issuance by financials, particularly the major banks,” he explained.

“This has substituted for the dislocation in asset backed corporate bond markets.”

In both cases, these words are comforting.

Especially so, after two of Australia’s big four banks, the NAB and the ANZ,  announced that they are increasing their provision for bad debts.

Equally, though, it might be said that neither of these men is telling the whole story.

We can’t blame them for that.

These troubles spring, primarily from the US credit crunch.

That, in turn, arose from what the US economist, Paul Krugman, calls the “double bubble.”

Mortgage originators, in the US, lent recklessly, on a huge scale.

That produced both a lending bubble, then a bubble in US property prices.

Predictably, both bubbles burst, with disastrous results, which have still to be fully played out.

Krugman has hailed the rescue of Fannie Mae and Freddie Mac as “good news.”

But he adds “it won’t change the fact that that this decade’s double bubble in housing prices and loose lending has been a disaster for millions of Americans.”

And not just them.

As we have now seen, the collateral damage has already spread to two, well regulated, Australian banks.

But what happens, now?

A reporter, who attended a brief press conference, that Mr Swan held in Canberra yesterday, asked a particularly succicnt question.

“Bank lending,” he said, “has fallen by about 20 per cent so far this year.

“Do you think that increases the risk of a hard landing for the Australian economy?”

The Treasurer’s response was blunt, but not entirely convincing.


“I don’t necessarily accept that at all,” he said.

Once again, it is hard to blame him.

The full story of the credit crunch has yet to be told.

So what can be done?

Krugman says the financial regulation, which flowed from the Great Depression of the 1930s, must now be updated, to suit current conditions.

“The desperate rescue efforts of the past year make expanded regulation even more urgent,” he says.

But can the US Fed chief, Ben Bernanke, rise to that challenge?

That is still not known.

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Monday 28th July 2008 - 11:51 am

Australian banks take Samurai stance

by Alan Thornhill

Major Australian banks have been issuing so-called Samurai bonds in the Japanese market to protect themselves against the disruption caused by the global credit crisis.

An Assistant Governor of the Reserve Bank, Guy Debelle, confirmed this today, in a speech he gave to the Credit Summit in Sydney.

Mr Debelle, who has special responsibility for financial markets, said that the financial sector had driven much of the growth that had occurred, over the past year, in the stock of non government bonds.

“Banks have been tapping new sources of funds and diversifying their issuance across different markets,” Debelle said.

“A significant share of bond issuance in the March quarter was in the form of extendible bonds in the US through private placements.

“Each of the major banks has also recently tapped the Japanese market by issuing so-called ‘Samurai’ bonds for the first time.

“This enabled the banks to issue bonds at longer tenors (typically five years) than those issued in the US in early 2008,” Debelle said.

He said the stock of non government bonds had “increased markedly” over the past year.

“Australian banks’ bond issuance has been very strong, particularly in the first half of 2008,” Debelle said.

He said this had totalled $67 billion, in that time.

That was well above the average $32 billion raised in the same part of the previous financial year.

“The strong bond issuance reflects the re-intermediation that has taken place during the credit market turmoil, with banks undertaking a larger share of financing for the non-government sector,” Debelle said.

“In part, the issuance by the banks has also been precautionary in case the dislocation in credit markets was to worsen,” he added.

“The major banks are generally ahead on their funding plans.

“The issuance has been more than enough to meet the banks’ asset growth and maturation of existing issues,” Debelle said.

Over two-thirds of the banks’ bond issuance has been offshore and denominated in foreign currencies, particularly US dollars and euros.

“The choice of funding location primarily reflects cost considerations and the ability to tap long-standing buyer relationships.

“Earlier in the year, there were concerns that investors would have difficulty ‘digesting’ further offshore issuance, but this has not been borne out.

“Investor demand for bank paper (onshore and offshore) has been strong, with most recent issues oversubscribed, Debelle said.

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Monday 28th July 2008 - 11:08 am

Debt crisis:Australia escapes the worst, so far

by Alan Thornhill

Australia has escaped the worst of the US credit crunch – so far – according to an Assistant Governor of the Reserve Bank, Guy Debelle.

Mr Debelle, who has special responsibility for financial markets, made the observation while addressing a debt summit in Sydney today.

He admitted the world financial markets are in turmoil.

“It has been a turbulent time in global credit markets over the past year,” Debelle said.

But he said Australia had stood up well to the challenge.

“While there have been areas of dislocation in the Australian credit market, there have also been areas of strength,” the Reserve Bank chief said.

“The process of re-intermediation has seen strong issuance by financials, particularly the major banks,” he added.

“This has substituted for the dislocation in asset-backed and corporate bond markets.”

But Mr Debelle said there had been other effects.

“The rating downgrades of mortgage insurers and monoline bond insurers have had an effect on parts of the local bond market,” he said.

But that had not been widespread.

“…that exposure has been confined to a few relatively small pockets,” he said.

And, even there, the impact had been light.

“Those parts of the market which have been directly affected have proven to be relatively resilient to these downgrades,” Debelle said.

“In the case of the mortgage insurers, in part this has reflected the strength of the underlying asset class which has reduced the importance of mortgage insurance in the value of the security,” he added.

Wednesday 23rd July 2008 - 7:02 am

Correct change? It’s time to check

by Alan Thornhill


By R.U. Reddy

The Australian Stock Exchange may soon have some real competition.

The Australian Securities and Investment Commission has already received an undisclosed number of market licence applications, from agencies which have proposed alternative trading systems.

These proposals would involve trading in ASX listed securities, in direct competition with the exchange.

The Federal government is taking a sanguine attitude.

The Superannuation and Corporate Law Minister, Nick Sherry, says this kind of competition is “well established” in other advanced countries.

He says, too, that he has already received advice on the matter from ASIC.

“I….together with my colleagues, am considering it carefully,” he said.

That comment, made in a speech in Adelaide this week, is as frank as politicians ever get, when big changes are to be made.

Be ready.

That wasn’t the only useful hint Senator Sherry gave in that speech.

Not by a long way.

He said, too, that there is also “a large unmet need for low cost, simple superannuation advice.

“And the Federal government is determined to remedy that,” he added.

Cancel my last observation.

Goverments can be very direct, in what they say.

At times.

These times, admittedly, are rare.

But it pays to sit up and take notice, when they do occur.

So what else did Sherry have to say?

That’s a good question.

Quite a lot, actually.

Sherry, of course, is one of the movers and shakers, in the government’s financial ranks.

Like the recently retired Liberal Senator, John Watson, a fellow Tasmanian, Sherry has had a great deal to do with setting up Australia’s new superannuation system.

And as Watson, himself, noted that is now envied in many other countries.

Sherry, who was addressing a symposium, organised the the International Centre for Financial Services, declared again that the new Rudd government is working hard, to reduce “the regulatory burden on business.”

Some of the older participants, at that meeting, might well have shuddered at that.

Sherry’s words were remarkably similar to those of John Howard, who promised, before the 1996 elections, to cut red tape for small business in half.

That was back in the bad old days, when small business owners had to submit just one tax return, each year.

After the Howard government’s reforms, many now have to submit five tax returns a year.

Four quarterly BAS statements, plus an annual one, to keep the Tax Office happy.

Sherry recalled that he had released a discussion paper,, early in June, on possible ways of reforming financial services, credit legislation and credit reform.

He said the government’s aim, in doing that, is to improve, simplify and standardise the laws covering these areas. which are basic to the financial life of the nation.

“Regulation of many financial services is currently duplicated, patchy, confusing, difficult to change – and in some areas completely non-existent,” Sherry said.

“Not only that, but it also imposes unnecessary red tape on business.

“Clearly, that is not good enough,” he said.

The States agreed earlier this month that the Federal government will assume responsibility for all credit legislation.

“The scope of this legislation will be comprehensive,” Sherry said.

He said the Federal government is working on the details now.

And it would submit its plan to the premiers in October.

Other points to emerge from the Sherry speech include:-

  • Simplified disclosure documents are now a step closer to reality
  • The government is “making headway” on mutual recognition of securities with the US
  • It also as asked the Treasury and ASIC to jointly review the activities of credit agencies in Australia
  • Treasury is reviewing appropriate disclosure requirements for equity derivatives
  • The government’s superannuation clearing house, Superannuation Choice, should be operating by July 1 next year.

In short, this was a wide-ranging speech. -and follow the prompts  for more.

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Alan Thornhill

Alan Thornhill is a parliamentary press gallery journalist.
Private Briefing is updated daily with Australian personal finance news, analysis, and commentary.

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