The credit crunch continues to sink its teeth deeper into the flesh of the Australian financial sector. Late last Friday Centro (ASX: CNP) received a reprieve from its creditors. It's been given until April 30th to sell assets or repay debts. It must re-finance or repay over $2 billion in the next twelve months. Good luck with that.
For existing shareholders, it's awful. The company can sell choice assets to raise cash, but it's not likely to get top dollar for them. Or, it can issue new shares or convertible instruments (like Citigroup (NYSE: C) did) that dilute existing shareholders. Either way, the equity of existing shareholders is whittled away as the quality of the firms' assets is sold for a song or eroded by illiquid markets.
It's a "financial services bloodbath," says ANZ CEO Michael Smith. "Credit costs are going up, well above underlying earnings growth," he told investors in Melbourne this morning. The bank also set aside $220 million to cover potential losses related to investments guaranteed by one of the monoline insurance companies. Asset quality is deteriorating in the financial sector.
And there's no guarantee efforts to recapitalise ailing financial institutions will work in the end. The German government has agreed to provide another $1.5 billion to IKB Deutsche Industriebank. The bank, like UBS, Citibank, and so many others got in trouble when the U.S. sub-prime backed debt it owned turned out to be... well... worth a lot less.
It's the third "bailout" of IKB in the last year and the phrase "throwing good money after bad" springs to mine. Speaking of which, did you see that the U.K. government nationalised ailing mortgage lender Northern Rock this weekend?
British taxpayers are now the proud owners of a bank they've already loaned more than 55 billion pounds to. U.K. Chancellor Alistair Darling said private sector offers did not constitute "sufficient value for money to the taxpayer."
Darling justified the move by adding that, "It is better for the Government to hold on to Northern Rock for a temporary period and as and when market conditions improve, the value of Northern Rock will grow and therefore the taxpayer will gain. The long-term ownership of this bank must lie in the private sector."
Right. Who wants to own a bank that borrows money at long-term rates in order to lend it short-term to people who can't repay it?
The British people, that's who! Or so say Gordon Brown and Alistair Darling.
What is a government to do when the savings of voters are at stake? It must assume the liabilities of failed financial institutions and socialise the losses. It will probably happen in the U.S. before the whole mess is over, although it will look more like a policy change and less like a bailout. More on that later this week.
Dan Denning
The Daily Reckoning Australia
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About the Author
Dan Denning is the author of 2005's best-selling The Bull Hunter (John Wiley & Sons). He began his financial publishing career in 1997 and has covered financial markets form Baltimore, Paris, London and, beginning in 2005 Melbourne. He’s the editor of The Daily Reckoning Australia and the Publisher of Port Phillip Publishing.
Comment by John Delforno on 19 February 2008:
Dan,
Not very informative, adds nothing of value, sensationalizes everything and implies that Centro has little chance of surviving what is really a bank/financial sector lead recession.
The ANZ cheif said its a bloodbath - what he really is saying is that ANZ stuffed up badly but blames everyone else - that is the true story but hey, lets deflect that and blame other businesses.
Not impressed.
Comment by Pat on 19 February 2008:
Wasn't Northern Rock's problem that they borrowed at short term rates to lend at long term rates as opposed to being 'a bank that borrows money at long-term rates in order to lend it short-term'?