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Analysis: What the 2nd UK bank bailout means for NZ
On the face of it, the British government's second desperate attempt to bolster the UK banking system and jump start lending doesn't mean much for New Zealand's banks. Now that Lloyds TSB no longer owns National Bank, there aren't many direct or large connections between our banks and the British banks. Royal Bank of Scotland owns ABN Amro (the source of many of its problems), but ABN Amro is a relatively small investment banking and wholesale brokerage operation here, and part-owned retail broker ABN Amro Craigs should be relatively immune from the gyrations in London. The only bank of any significant size here with UK connections is HSBC. It was not involved in the announcements overnight and the UK makes up a relatively small part of its global footprint. There are some claims from a dissident shareholder that HSBC needs to raise capital because of its exposures to the sub prime and housing markets in the United States through its HFC division. But HSBC says it has plenty of capital and I haven't seen any independent observers questioning that.
Unlike Britain's banks, New Zealand's banks are still lending, albeit at a much reduced rate. One of the reasons cited for the urgent measures announced overnight in Britain was that British banks have stopped lending to each other and to businesses and consumers, despite the various government guarantees and capital injections announced in October. New Zealand banks are still growing lending. Reserve Bank figures show bank and non-bank housing lending grew NZ$136 million in November, while business lending grew NZ$924 million in the month and farm lending rose NZ$372 million. We won't get the figures for December until the end of this month, but the anecdotal signs and the indications from home loan approvals numbers show activity was relatively robust after the 150 basis point cut in the Official Cash Rate to 5% on December 4. Mortgage , business and farm Lending growth in November from October was around 0.5% overall. Figures from the British Bankers Association show that corporate lending in particular has collapsed. Mortgage, personal and corporate lending in Britain grew just 0.29% in November from October. Corporate lending growth fell to 1.3 billion pounds in November from 50.7 billion pounds in October and a six month average of 18.7 billion pounds a month. 
British corporate lending has collapsed largely because the wholesale markets remain virtually closed. Prime Minister Gordon Brown also pointed ominously to the new problem of "financial isolationism" where foreign (often US) banks have sharply reduced lending across borders as they pull in their horns and scramble for survival rather than lending growth. British banks depended on foreign lenders for about 40% of its funding. This is where the connections between New Zealand's and Britain's situations become stronger. New Zealand's banks also rely on foreign wholesale funding for around 30% of lending, depending on how its measured. There have been signs in the last month or two that these markets were beginning to reopen to New Zealand and Australian banks. Our wholesale markets have been less affected by the Credit Crunch than those in London and New York, although our banks were still unable to raise longer term funds (anything more than a month or two). The Australian bank parents of our banks have been successful in recent weeks in raising tens of billions of Australian dollars through government guaranteed bond issues. This takes some of the pressure off our banks, who have also been taking advantage of the Reserve Bank of New Zealand's Term Auction Facility (TAF). This facility is designed to help tide the banks over for the next six to 12 months in case they struggle to refinance some of the short term foreign debt. The Reserve Bank has lent the banks NZ$6.1 billion through the TAF since it was launched on November 12. This includes lending against Residential Mortgage Backed Securities (RMBS) created by the banks from their mortgage books. This is the Reserve Bank's main tool to help the banks cope with the virtual closure of international markets to raise funding. 
This issue of "financial isolationism" is the most significant implication from last night's announcements in Britain. Gordon Brown's words on this are chilling. "The greatest risk after the events of the last few months is a retreat into what I would call financial isolationism," Brown told the Financial Times over the weekend in the lead-up to the announcements. Isolationism on trade, driven by politicians enacting tariffs and restrictions, was a significant contributor to the severity of the Depression in the 1930s. Now we are seeing a "financial isolationism" driven by bankers frozen in the headlights of trucks bearing down on them with tonnes of toxic debt. The final implication of the second British bailout is that there had to be a second one. Gordon Brown was lauded back in October for coming up with the 'solution' to the Credit Crunch when he pledged to spend 250 billion pounds providing various deposit and whole issuance guarantees along with capital injections, rather than insuring or quarantining toxic debt. The Brown approach was widely aped in Europe and the United States. Many thought it would be enough to stabilise the situation. 
But the scale of the second bailout and the sense of frustration evident in Brown's comments about banks not lending show that the Credit Crunch is entering a worrying new phase. Now the global recession and growing unemployment is creating a new swathe of toxic debt that has to be quarantined to create some transparency and rebuild the confidence of lenders. Most of the measures announced last night are unlikely to be needed here, or have already been put in place. The first and biggest one is an insurance scheme for toxic assets, rather than a 'bad bank' where the government or someone else takes over the asset and quarantines them. Essentially the banks are taking out a credit default swap with the British Government over these assets for a fee that has yet to be determined. There's no need that I can see for that here. Secondly, the British government is setting up a guarantee scheme for banks to issue asset backed securities over mortgage, consumer and corporate debt. This is an extended version of the wholesale guarantee scheme already in place in New Zealand, although it has yet to be used. Australia's wholesale guarantee is being heavily used. Thirdly, Britain is also setting up a 50 billion pound facility for the Bank of England to lend directly to corporates, effectively short circuiting the financial system to get around the British bankers frozen in the headlights. New Zealand doesn't have this yet and there appears little need for it while business lending is still growing. The Reserve Bank has said it will accept commercial paper as security, but only when lending to banks. It has yet to decide to lend directly to corporates. Finally, the British government is converting its preference shares in Royal Bank of Scotland (RBS) into shares, increasing its stake to 70%. In return, RBS has promised to keep lending to small businesses and households at 2007 levels, while increasing lending to businesses by 6 billion pounds. New Zealand is nowhere near having to do anything like this. Our banks did not go on the sort of wholesale debt funded acquisition sprees of investment banks that RBS embarked on over a period of years before the Credit Crunch destroyed investment banks and the sort of wholesale debt funding used heavily by RBS. Ultimately, the implications for New Zealand are indirect, but important. The British measures show the global financial system remains volatile and unstable. Our dependence on foreign wholesale funding means we remain vulnerable. The impending decision by Standard and Poor's about whether to downgrade New Zealand's credit rating (it is on review for downgrade) has increased our vulnerability. Our Reserve Bank still has some weapons up its sleeve, including slashing interest rates, quantitative easing (money printing), lending directly to corporates, and massively increasing the size of the TAF if the situation deteriorates further. We can only hope Gordon Brown's latest attempt at stabilising the core of Britain's banking system is successful. If the bankers in London remain frozen in the headlights and their counterparts in New York continue to shy away from lending across borders then we have not seen the last of the turmoil that is now hammering the real economy.
45 Comments
Bernard, I disagree NZ banks
Bernard,
I disagree NZ banks are still growing total lending, but I am open to data that supports your claim. My position is based on RBNZ data, New Zealand dollar claims by sector - registered banks:
November 2008: $317,377 million
October 2008: $318,047 million
That may have been quite a turning point, and is one that I have pointed out on this site. I believe that in both December and this month banks will have reduced lending further.
What is your support for this? I think it directly contradicts a statement Bollard made regards having made that decision.
Bernard replies
Peter R
Many thanks. I was using C5 Sector Credit, which showed growth. I see from C2 Credit Aggregates there has been a fall. I'll check on the discrepancy with the Reserve Bank.
On the issue of the RBNZ not lending directly to the corporate sector. I was relying on this December 12 liquidity measures statement. http://rbnz.govt.nz/news/2008/3511783.html where the Deputy Governor Grant Spencer said this: "Mr Spencer noted that these liquidity measures did not mean the Reserve Bank would be lending direct to the corporate sector. However, corporate debt will become more liquid and therefore a more attractive investment prospect for banks and portfolio managers."
Cheers/Bernard
How about an article which
How about an article which predicts the likely effects on NZ of a downgrade by S&P?
All the present chatter about a falling OCR in my opinion deliberately masks the liklihood of this lowered interest rate 'window' being very, very short-lived.
I wonder whether alot of fixed rate borrowers who are breaking 3 or 5 years terms and increasing their borrowing to the tune of those break penalities - might find themselves on floating rates that at the time of S&Ps downgrade suddenly jump way higher than what they 'broke' at.
Bernard replies
Kate,
You make a good point. I am also concerned about a credit rating downgrade.
cheers
Bernard
And what effect will the
And what effect will the dairy farms debt tsunami have on the ratings risk:
http://www.agridata.co.nz/blog/2009/01/20/analyst-warns-of-debt-tsunami/...
Lending based on derivatives of
Lending based on derivatives of any form, commercial paper or mortgag securities etc, carry an unknown "black swan" risk. We need two types of banks, government owned and conservative whch lends no more than 50% of "value", and private banks who may take higher risks. All banks including the kiwi bank fits to only one rule- lending on unknown risks. Nothing is going to stop governments socialising private debt, drown our $ to lows, reducing the standard of living for most and sinking the poor into further poverty trap.
</b> Kate & Bernard, How
Kate & Bernard,
How about something on the fundamentals of what makes up the components of the interest rate you pay i.e. a positive return (after tax), compensation for the risk of default, and an adjustment for inflation/deflation.
Especially in times when the asset you have bought is deflating at a rate of up to 10% pa. Or from a lenders perspective, the risk of default may be greater than 10%.
But then politicians and central bankers don't believe supply and demand hold for capital. Elected omnipotence is divine.
Surely substituting RBNZ TAF lending
Surely substituting RBNZ TAF lending for short term foreign debt leaves NZ a nett foreign exchange liability when the borrowing isn't rolled over? What is the likely impact on the balance of payments, the exchange rate and consequently the NZ$ value of this liability?
Make that a compounding debt
Make that a compounding debt tsunami andy, no ability to service the large chunk of debt means its going to get real big real fast......
I think this is really
I think this is really BIG news:
NZ government looking at corporate bailouts..............
http://www.nzx.com/news/4824588
From what some of the farming insiders have said previously (and with this tsunami of debt) anyone for PGG Wrightson or Fonterra?
That is big news, but
That is big news, but will probably be huddled into the corner, away from the media hype
Our leader says ....."I don't think we need to be constantly talking ourselves into a doom and gloom spiral".
No s**t John we are already up to or neck into it, the real problem is we can't talk our way out of it either.
Silver Fern Farms has tsunami surfing to do as well......
Everyone is in the same
Everyone is in the same boat...its like the Titanic going down.
Some will survive but there aren't enough lifeboats to go round.
I thought Titanic was a long movie but this sinking is taking forever.
At some point the money supply will be nationalised in full.
Yes Raf...worldwide the banking system
Yes Raf...worldwide the banking system is now existing on hallucinatory equity and the debt mountain associated with the now vanishing delusion of unfetted computer generated surreal debt finance.
As you say the actual money supply will likely be nationalised. The debt will be dumped into a Govt offal pit and new value printed in hard currency.
The GB taxpayer has in effect taken over the debris after their biggest banks collapse into their huge debt abyss (the Great British Pound is stuffed).
If JK bails out the BIG NZ Corporates (and he will need to) like Fonterra by creating new money to replace their debt abyss it is a not a lot different to the GB scene ...apart from the NZ banks being given a temporary reprieve...they are stuffed as we are seeing the entropy (total collapse) of the world's existing debt burdened currency. Perhaps we will see a lean, rational Dairy Board arise from the rubble.Perhaps the NZ Dollar is doomed.
Therefore, JK should consider the huge amounts of pending Govt direct injection bailout funding as a new currency,take the initiative and say ....call it the NZTasman and retain the sole right of issue(sorry Aussy trading banks). (Europe existed with dual currencies as the Euro was developed. The NZ $ is stuffed!!!!!
Raf and Co , am I completely and absolutely nuts or too radical in suggesting the NZ Dollar internationally will become virtually worthless and obsolete oddity!
I suggest JK needs to take the radical step and rebrand the huge quantities of real NZ currency he is about to issue as the NZT, not associate it with the debt ridden NZD and take steps protect the NZT from trading bank and corporate exploitation..
This article does not address
This article does not address the ABN Trust preferreds. Where do they stand in the 'mix'. Is conversion the only option?
(as the Bank of England has done)
Spain and Greece have been
Spain and Greece have been downgraded to A-. New Zealand can't be far behind.
Bernard You have and unclosed
Bernard
You have and unclosed strong tag in your reply to Kate
HTH
Thanks Neven. Fixed now. cheers/bernard
Neven
Must be about time for
Must be about time for the EUR to collapse spectacularly.
Tonz That wont happen. We
Tonz
That wont happen. We are stuck with our debts. We took our chances enjoyed the party and now want to avoid the hangover. I see Spain has been downgraded how long till its our turn? Just takes time for S&P to get the paper work done. We can create a new currency but it would not float, the banks wouldn't touch it.End of the day we need to live with in our means, this would be a good start.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaSJ5d9DuXkc
This would be a good
This would be a good start
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaSJ5d9DuXkc
Tonz, It's a race to
Tonz,
It's a race to the bottom at the moment.
Who knows..all debts may be wiped out here. Is it better to be a debtor or a creditor? I'm not sure I'd be in Japan's position here........or China's. They own a lot of US paper....maybe they should start buying US assets like crazy....converting paper into real stuff.
Ultimately this all comes back to Bretton Woods. We have a very unstable global trading system where huge imbalances have been allowed to happen.
That could and should change.
In terms of the currency i agree the government should actually start printing hard cash and put it directly into the economy as payment for the upcoming fiscal stimulus.
This money will be debt free and thus will not incur the burden of compound interest.
It's time to wean ourselves off the foreign debt teat.
It won't be easy but I figure we already have enough computers, cars and TVs to keep us going.
To revert to the headline question, all this means that the days of private banking as we know it are coming to an end. The UK is in dire straits.
As i noted when Northern Rock was taken over, the UK banking system had been de facto nationalised. All we are seeing is the administrative details being worked through.
Will that happen here?
Probably.
Is that a disaster?
No because we have Kiwibank already up and running.
LOL. Kiwibank, saviour of the
LOL. Kiwibank, saviour of the financial system!
Raf, your question "Is it
Raf, your question "Is it better to be a debtor or a creditor?" is most certainly an interesting one.
expat "Must be about time
expat
"Must be about time for the EUR to collapse spectacularly."
You must be kidding, Its the tallest pygmy especially when everyone works out how screwed the US & UK are.
1/ They are not waging war (or two)
2/ They have always been dependent on oil/gas imports (unlike the UK which is in transition) and therefore know how to power down.
3/ They imported most of their toxic debt from the US, so once written off it is lanced, unlike the US which will have ongoing social/employment problems from the wealth evaporating
What Id like to know is how HSBC has avoided the carnage? or are they lying? Or are they smugly sitting on some of the 1.5 Trillion in Alt-A and ARM's about to reset? How much commercial property exposure do these banks have?
Neven
IMHO it is far better
IMHO it is far better that the taxpayer bails out firms that actually produce things of value, in the long run this is where the country's wealth comes from, not the banks.
In the case of Britain, why exactly shouldn't banks that have over-leveraged themselves, and in the process caused this whole mess, be allowed to fail like any other business? Why are generations of UK taxpayers now on the hook for their speculative excess?
Christopher Wood from CLSA agrees
Christopher Wood from CLSA agrees that a proactive full-scale nationalisation is the best way to resolve the financial crisis. NZ will eventually have to follow the Swedish model - and the sooner the better.
http://www.ft.com/cms/s/0/480fd936-e691-11dd-8e4f-0000779fd2ac.html
To add to my above
To add to my above comments that radical action is needed in terms of NZ currency.
What the UK bailout means for NZ ...it is far wider than that....
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOYw.awwsNSg&refer=home
What the UK bailout means
What the UK bailout means for NZ?
Wake up .......the bail outs are deeper than we can imagine..
NZ needs to take radical steps
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOYw.awwsNSg&refer=home
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOYw.aww
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOYw.awwsNSg&refer=home
UKK, what you are seeing
UKK, what you are seeing (check out Obamessiah's speech, too, for many references to this very thing) is a return to a hierarchy of values.
"Produce things of value" - implies that hierarchy. Beacuse by definition, other things must be of less or even of no value.
Now the really tricky thing comes when one applies That notion to, say, welfare, which is a sideways transfer from Them Wot Can to Them Wot Can't (or Won't).
A certain amount of, shall we say, triage, will be applied. And That will be quite a test for social cohesion. Because a hierarchy of values implies that there must, again by definition, be undeserving cases out there.
And in case we don't think this is an issue, check out the % of GDP devoted to these sideways transfers....
Dosser, Yes it's been inevitable
Dosser,
Yes it's been inevitable once NRock and Bear went down. The US have flapped about trying to keep the banks afloat primarily because so many US officials are ex and current bankers. The UK has taken a more direct approach but both have failed to knock the banks into shape.
Equity in banks needs to be revalued to the appropriate level and then they can be nationalised or recapitalised.
Is there anyone who still owns shares in banks?
I guess so.
Expat,
You may laugh at old Kiwibank but it is at least a channel to market for the government. It may be the one thing that keeps NZ afloat as the overseas owned banks spiral further downwards.
Dosser - Thanks for the
Dosser - Thanks for the link to the FT article. It is very interesting to note that he lays the blame for the current financial crisis on the Central Bankers who completely ignored the huge increase in debt. No wonder there is no solution, the exact same people who caused it are now trying (unsuccesfully) to fix it.
waymad - your suggestion that
waymad - your suggestion that what we are witnessing "is a return to a hierarchy of values", I'm not so sure about - as values, to my mind, have and always will dominate/motivate/inform social (and political) actions.
The greatest irony of today, is that the strongest state proponents of neoliberal market theory, are the ones now most affected by market failure. And they are also the ones turning to new mechanisms of corporate welfare, as a reaction to this market failure.
Perhaps the 'values' argument is no longer one of the cost to society of social welfare, but rather the cost to society of corporate welfare?
It goes deeper than what
It goes deeper than what the UK Bank bailout means for us...
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOYw.awwsNSg&refer=w...
NZ as I suggest above needs to take radical action...
and what does thios mean
and what does thios mean for us?
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOYw.awwsNSg&refer=w...
Iain, Raf and others It's
Iain, Raf and others
It's starting to get interesting now, newspaper articles on alternative approaches to money supply are starting to appear over here (uk)...
http://www.guardian.co.uk/commentisfree/2009/jan/20/george-monbiot-reces...
This is what we should
This is what we should be doing here:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaSJ5d9DuXkc
Roger J Kerr, please take note before next suggesting we will be the first country to come out of recession.
Kate, the traditional welfare was
Kate, the traditional welfare was and is a social contract that says, in essence, we pay you, you don't cause trouble, then we feel justified in totally ignoring you. No relationship.
Corporate welfare is nepotism writ large - crony capitalism, if you follow e.g. wallstreetexaminer. A close, cosy relationship. Big difference.
Point really, is, who's gonna pay for any of this welfare? What are the limits of taxability? NZ hasn't been a rich country for 20-30 years, so, again, there is going to be triage to make sure we spend within our means, and get the least bad outcomes for that spend (there are no good ones...). And an older, sterner (and more sustainable) value system is what's going to drive a lot of that.
After all, the point of triage is to separate the incoming into three groups:
- the dying - do nothing
- those who will make it by themselves, probably. Do nothing.
- those who will die if no intervention. Intervene.
Judgements are the essence.
And judgements about sovereign debt are certainly being made in the markets as we speak....
SimonD, Yes it's good that
SimonD,
Yes it's good that at last this is creeping into mainstream newspapers. As Monbiot notes though, he is no expert on this. And that may be our problem. Money is an esoteric beast and it's very easy to look silly trying to explain its fallacies.
The UK is reasonably well advanced politically in this arena. At least 6 Early Day Motions have been presented in Parliament over the last 7 years with some 40-50 MPs signing on. So the groundwork has been laid for some form of political debate. Of course the Bank of England has been extremely unhelpful in this matter much like the RBNZ over here.
Clashes of ideology are never helpful which is wahy it's always good to stick to the facts in this area.
How do we create money?
How does it enter the economy?
How does it circulate?
etc etc.
Here is an example of an EDM from 2003 on financing public investment without the use of PPPs.
http://sustento.org.nz/wp-content/uploads/2007/06/new-finance-initiative...
We are fortunate in NZ to have many people with very in depth knowledge in this area and that should help us move forward along these lines (btw they don't work for the government!)
The UK bailout is one
The UK bailout is one thing ....but what does this mean for us? Radical action ?
http://www.bloomberg.com/apps/news?pid=20601087&sid=aOYw.awwsNSg&refer=w...
What does the UK bank
What does the UK bank bailout mean for us?
Further to Bernard`s 90 at 9 today click onto Bloomberg regarding US banks ...then think what is that going to do for us?
As I suggest in my above post, radical action is needed in NZ while we still have the chance.
Obama should have used the
Obama should have used the following Lincoln quote during his inauguration speech rather than the one he did:
"The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity."
Odds of seeing that in NZ under a government led by a former money trader?
Thank you SimonD, that's made
Thank you SimonD, that's made my day :)
Bernard;s book "The Future of Money" is brilliant, if you can get it.
For anyone who wants a MASS of links and quotes from his book, you can get it here:
Bernard A. Lietaer - The Future of Money, A very good book relevant to a finite world
http://www.greenenergyinvestors.com/index.php?showtopic=5083
Also, this one:
Healthy Money, Healthy Planet: Developing Sustainability through New Money Systems, Book by Kiwi author Deirdre Kent
http://www.greenenergyinvestors.com/index.php?showtopic=5641
A Kiwi author, and the book is only $35 from Helen Dew. See link.
Steve :)
Dosser, I think there's every
Dosser,
I think there's every chance of that happening once the situation is explained.
As a former money trader myself I know that enlightenment does happen :-)
Raf, no offence to money
Raf, no offence to money traders in general, but Key doesn't strike me as the type to take radical action that would remove the privileges of vested interests. Meaningful change will only come if the crisis leads to violence on the streets.
Tonz I think Singapore is
Tonz
I think Singapore is leading the way.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aaSJ5d9DuXkc
Raf
I see no reason why savers and people with discipline should shoulder the responsibility of those in the community who have been reckless and taken risks they are not prepared to face up to. A deal is a deal. This includes banks.
let's hope it doesn't come
let's hope it doesn't come to that. a quick look at the US and UK should be ample evidence to show where we may be heading.
Andrew, I like the idea
Andrew,
I like the idea of civil servants having their salaries cut. Especially since so many now earn over 100k a year.
But on the point of savers: a saver deposits their money in the bank for safekeeping, convenience (paying bills etc) and also to receive a return on their investment. But ultimately there is no guarantee as to your rate of return or, as we see know, even the security of your deposit.
Remember bank deposits are treated as unsecured liabilities of the bank.
It would be nice if Bernard really took it to the banking system but i notice he's sponsored by ASB! :-)