house prices might tell us where we are headed, page-5

I have a lot of time for John Needham (although I'm not a convert to his TA theories). He is quite an astute observer of the antipodean markets. He recently had this to say about the Aussie banks:-

In Asia, the global credit crunch rolls on with machinery orders down 16.9% in Japan yesterday. This is a good leading indicator of future capital expenditure so the coming months look bleaker as data continues to make a nonsense of the disconnect theory for Asian markets.

If there is a disconnect, it is in Australia where housing prices have fallen just 5% year on year. To understand the differences between US and Down Under housing markets it is necessary to look at the different lending regimes which prevail. In Australia and New Zealand, all home mortgage lending is full recourse, that is the mortgagor (borrower) unconditionally guarantees principal and interest to the lenders. There is no jingle mail. Even after foreclosure the borrower remains liable for any short fall on realization and lenders are known for using the full weight of the law to enforce collections.

Whilst there were endless 100% plus LTV mortgages available up until just two months ago Down Under, the norm was full documentation and the loss rates in full doc loans have been minimal. For the lo doc loans, the arrears rate is approaching 15% but this comprises a very small percentage of the Australian market. The Australian Federal government was quick to jump on the bandwagon of guaranteeing individual and corporate bank accounts, and early on, went the whole hog of guaranteeing real estate, credit card and auto loan securitization. In other words they have effectively nationalized the fund raising industry without taking control of the banks or other lending entities. naturally the banks are milking this with all their might. This from Business Spectator today:

Australian banks have issued about $40 billion worth of government guaranteed, AAA-rated bonds in five weeks – two-thirds of the amount they raised from global markets in the whole of 2007.

It’s also 40 per cent of their entire 2009 debt maturity needs. While the share prices of US and European banks continue to crash as they fight for survival, the Australian banks are engaging in a once-in-a-lifetime dash for cash – wildly distorting the market in their favour thanks to the Rudd government’s decision to guarantee their offshore debt raisings. As a result the banks are mopping up all available cash at the expense of corporations. With so much AAA, sovereign guaranteed bank paper available at quite healthy yields, the international credit market (such as it is) has little interest in the A+, A and A- paper being offered by Australia’s leading corporations, even at triple or quadruple the margin.

The banks are like kids let loose in a lolly shop: they are paying as little as 100 basis points over the bank bill swap rate (BBSW) and getting plenty of money at that price. (BBSW is Australia’s version of Libor; yesterday it was set at 3.86 per cent, 40 points below the RBA cash rate, in anticipation of a rate cut in February. Usually BBSW and cash are roughly the same.) On top of that margin, the banks have to pay the government 70 basis points for the guarantee, but it’s worth it. Oh yes, indeed.

They have a captive corporate market for the funds that produce a very handy interest margin to help make up for all the loan losses they are wearing from the past follies of now-departed hotshot credit marketers whom they used to employ. According to an ANZ presentation last month Australian companies must replace $15-20 billion in syndicated debt in the next six months. For the whole of 2009, I have heard estimates of anything up to $90 billion as a result of credit boom conditions three years ago.

But the debt markets are closed to these corporates because the banks are crowding them out with a government guaranteed monopoly. They have to go to the banks for the money and, naturally, get screwed. They are being forced to pay margins over the banks’ cost of funds of up to 400 basis points, and the banks’ lending officers are shackling them with the most horrendous covenants and charges. No more “covenant lite” baby – it’s “covenant heavy” nowadays.

The good news is that the benchmark rate – BBSW – is collapsing with the cash rate, although not as much as Libor in the US and Europe. Currently below 4 per cent, it was as high as 8 per cent last year. In the US, Libor, which stands for London Interbank Offered Rate, was 5 per cent, now 1.08 per cent; in Europe it is 2.56 per cent, and last night the European Central Bank cut the cash rate again, by 50 basis points. So thanks to the global recession, blue chip local companies can still borrow money at a rate of less than 10 per cent and falling – it’s just that there is a long way between the official RBA rate and what they are paying. When they go shopping for cash there are only four stores in the mall: ANZ, Commonwealth, Westpac and NAB.

Did the Australian government have to offer to guarantee the offshore debt raisings of local banks? Who knows, but it did it. The result is that 2009 is the year of the banks’ revenge.

This is the path that US will go down as they attempt to put Humpty Dumpty, the fallen proxy of banks and broker-dealers, back together again.

http://financialsense.com/asia/danielcode/2009/0116.html