IMF Report Concludes Aussie Banks are “Very Sound”…

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“Where might another shock come from? I’m not sure there will be one. I don’t think there will be,” said Reserve Bank Governor Glenn Stevens at a conference in Perth yesterday. Uh. You’d better mark those words.

The Guv also said he would not be too timid about raising interest rates. He believes the threat [of global financial calamity] has passed and that the bigger threat may well be inflation. That kind of tough talk sent the Aussie dollar right up to over 92 cents against the greenback. If it weren’t late fall, now might be the perfect time to take a trip to America and see how cheap things really are.

But it is a bit surprising that a Central banker would say he’s not sure there WILL be another shock to the world’s financial system. The last twenty years show a history of regular shocks. The economic models of economists suggest these shocks are 100-year or even 500-year events. But they just keep happening!

The Peso Crisis…the Asian Crisis…the Russian bond crisis which led to the fall of Long Term Capital Management…Bear Stearns…Iceland…Northern Rock…the entire GFC…nope! None of those could ever happen again. Especially in a world that’s reducing debt where asset markets are now undervalued and house prices have dramatically corrected and banks have recapitalised.

Well, that’s the story that Stevens probably believes. But you know our view. There’s a lot more bad debt out there posing as assets. There are more credit write downs. Banks have a boatload of commercial real estate and residential housing assets and a thin slice of equity capital supporting them. There is still a lot of leverage in the financial system. And that leverage exposes banks to losses.

For example, today’s AFR cites research from the International Monetary Fund and concludes that Aussie banks could lose as much as two percent of total loans outstanding if corporate and household defaults increase. And gee, that’s not likely at all when interest rates rise quickly, is it?

According to the AFR, the IMF report does conclude Aussie banks are “very sound”, but they could lose $33 billion from rising defaults. We’re not sure what default rate the report assumed, but we reckon it was probably too low. Nearly everyone in the financial establishment underestimated the depth of the crisis last time, too.

The other threat is that that Aussie banks source 30% of their loan funding from international credit markets, according to the IMF. Australia’s short-term external debt is about $400 billion this year, according to the AFR. Is that really a threat?

It doesn’t seem like one right now. Interest rates are rising and the Aussie dollar looks like it’s headed to parity against the USD. This makes Australia a popular destination for international capital flows. After all, you have heaps of foreign investors pouring in to buy Australian property. The place is a capital nirvana!

But yes, it is vulnerability. For one, it means growth in the Australian economy is not sourced from domestic savings but from borrowed foreign money, which must later be repaid. Second, it means that the income and rent from Australia’s capital stock (houses, property, shares, and bonds) may not be making Australians rich or even staying in Australia.

Granted, if the Boomers are selling their houses to Chinese investors in order to finance a comfortable retirement, it should work out well for the Boomers. But their children may be renting from Chinese landlords for a long time to come. And no, we’re not blaming the Chinese for this at all. It’s a great move for Chinese investors. But it may not be such a great development in the capital structure of Australia.

But at the moment, you wouldn’t get that sense that rising public debts and the transfer of ownership of Australia’s capital assets are any worry whatsoever. Sure haven’t seen much of it in the papers or on the TV shows. It’s like everyone’s forgotten that the more integrated the world’s financial markets have become, the more they’ve tended toward instability. Or everyone believes whatever was wrong before has been fixed now.

One person who had his wagon fixed yesterday was Bank of America CEO Ken Lewis. America’s new pay tsar (the U.S. Treasury Special Master for Compensation, Kenneth Feinberg) stripped Lewis of his 2009 salary. Don’t cry for Lewis just yet. His retirement package will leave him with between US$70 and US$120 million.

But why is there even a pay master to begin with? Isn’t that the job of boards of directors and shareholders? Could government charades to regulate the corporate sector get any more cosmetic? Coming soon, a pay master for your job.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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13 Comments on "IMF Report Concludes Aussie Banks are “Very Sound”…"

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wasabu
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Glen’s not a stupid man – he knows full well the importance of propaganda in such a precarious world economy. If you read between the lines (or Glen’s other cheeks), you might hear a a final call to action to the masses to just go out and spend, borrow, just do something or we’re all dead! Oh and CommBank dumps account keeping fees… oh thank you benevolent lord! For all these years I have paid tribute so that you can keep my money save, why now you need my money so bad? Smells to me like they’re having trouble raising… Read more »
Michael
Guest

Walking off with $70-100 million?!

That’s shareholder money. Thank God someone is looking at the incestous wink-wink snouts-in-the-trough culture of the oldboys network.

christina
Guest

I’m so glad that I’ve got daily reckoning to tell me the truth about the economy, you guys rock! :-) If I want to read the facts, I read daily reckoning. If I want to read a fiction book to have a good laugh, I read the newspapers

Ned S
Guest
The new owners did their handover inspection on the house my parents sold yesterday. Older style brick highset with original 3 bedrooms, kitchen, dining, lounge, bathroom and WC up (with an enclosed extension at the back that would make a great 4th double bedroom) plus developed underneath with kitchen, dining, lounge, one large bedroom with ensuite, one very small bedroom and potential for more if required. Recent immigrants purchased the place apparently – There was an older lady, four middle aged adults and a bunch of high school age or older children turned up to have a look. I’m sure… Read more »
Dan
Guest
Indeed, Ned. When I was a kid we helped out several Vietnamese refugee families who worked in a similar way (though they mostly helped themselves I have to say). As soon as they could they moved out of housing commission into a small house – big families, 5-10 in all, old and young, sharing all the rooms and so on. They never took out loans, but pooled their incomes and bought places, separating out the extended family into its units into the houses. It worked well and was probably the fastest way to get established when you start in a… Read more »
Dan
Guest
Regarding the article, the foreign national investment into Australian housing (while it totally goes against my ideal of locals owning local stuff) is just as likely to go wrong for them as for any local. It’s not a real threat to sovereignty, as there is really no such thing as property ‘ownership’ in Australia – just no debts on your license to live somewhere … the movie ‘The Castle’ rarely happens in real life. You can’t declare your house or suburb a separate nation state, although people try to create ghettos (some very wealthy ones) with their walls and exclusive… Read more »
Dan (not Denning)
Guest
Australian residential housing is a pretty stupid investment on an income basis, whether you’re a local or an overseas investor. The rent you’ll get back is highly unlikely to even pay your interest bills, leaving holding costs completely out of the picture. Australians aren’t going to be able to keep paying higher and higher rents, because incomes just aren’t going to keep up. If you want a return on property these days, it’s all got to come from capital gains, which are totally dependent on an increase in the nation’s total mortgage debt. It may not blow up this year,… Read more »
Ned S
Guest
The most switched on computer tech I’ve ever known came out of Vietnam (via the US) as a refugee Dan – I won’t bore DR readers with the details – I’ll just settle for saying he was exceptional IMO and others who know him share that opinion. And the last time I visited him (1997 perhaps?), he and his were living in a large modern highset home in one of Brisbane’s upper middleclass suburbs – And chatting to him since over the phone, I gather that he thinks his brother is the smart and competant one in the family? (The… Read more »
Pete
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Speaking to real estate agents, and reading the papers, I conclude that most overseas ‘investors’ (read Chinese investors) are after property for capital gains and to ‘land bank’. They are not wanting to redevelop property or use it for ‘income’. This makes them speculators, plain and simple. What this also does is make them unreliable in the longer term. Yes, I know a lot of them may well hang on to properties for longer…but I believe that as soon as things start shifting the other way they will be selling as soon as they can. This is also greatly affected… Read more »
Dan M
Guest
Huge proliferation of Dans. hope it’s not confusing! Agreed Pete, homeowners buy to live somewhere. Speculators hold as long as they can see light at the end of the tunnel. Have a look at the Case-Shiller index. If you bought at the height of the 1890s property boom, it would have taken almost 100 years before you reached the same value on an inflation adjusted basis! A steadily falling market, or even just level pegging for a couple of years, should clean out large numbers of leveraged speculators, which leads to a more rapidly falling market. Why buy a cash… Read more »
wasabu
Guest
Pete: Anyone that opens their mouth is practicing philosophy – albeit in a lousy fashion for the most part. In the same way, practically everyone with a valued asset is a speculator. Who in their right mind does not wish their posessions to magically increase in value without doing anything? What is unsustainable is the easy money, printing press policies of the G7 since Nixon threw out the discipline of gold/silver backing in 1971. That is what is unsustainable. When ‘credit’ (ie read credibility to repay loans) begain expanding at a rate of knots. This faux credibility, as it does… Read more »
Dan
Guest

Wow, DR commentary is good reading today!

Pete
Guest
wasabu: “In the same way, practically everyone with a valued asset is a speculator.” What about the home owner/occupier? If they do not care for the value of their home, other than to pay it off, then how are they speculating at all? The issue with that idea is that property is considered both an investment AND a place to live. The credit is unsustainable, but who is to say that the overseas investors (read Chinese investors) are using credit to speculate? It was only recently that laws allowing overseas investment by Chinese were relaxed to allow this surge. They… Read more »
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