90 seconds at 9 am with BNZ; Moody's warns banks of possible downgrade

90 seconds at 9 am with BNZ; Moody's warns banks of possible downgrade

David Chaston details the key news overnight in 90 seconds at 9 am in association with Bank of New Zealand, including news that  international ratings firm Moody’s has placed all four major New Zealand banks on review for a possible downgrade. And it has done that because it has taken the same action on each of their Australian parent banks.

Moody’s have specific concerns. These banks all currently have an Aa2 rating, similar to Standard & Poor’s AA rating, and are among a relatively small group of banks worldwide with investment grade credit ratings.

What is apparently worrying Moody’s is that, as the world changes and long-term interest rates rise, this may damage these bank’s balance sheets and earnings.

They say they are concerned about “structural sensitivities to wholesale market conditions”.  The global financial crisis has underlined the speed with which shifts in investor confidence can impact bank funding, and wholesale funds comprise on average 43% of total liabilities of these banks.

Recently, the Reserve Bank gave these trading banks the ok to issue up to 10% of their liabilities as covered bonds. The banks have been piling into them – in fact it caused the Australian regulator to lift a ban on them over there. Covered bonds are essentially issued to foreigners in the wholesale market, building the exposures that concerns Moody’s.

The consequences for us? Market signals indicate that long term interest rates are on the rise, and if Moody’s do downgrade the banks, they will have to pay more for their funds, and that will be on top of the market rises that are coming anyway.

That will be good for local investors, who will see returns rise, but not so good for borrowers. Maybe homeowners with a floating mortgage won’t be affected immediately, but business borrowing will see early increases if credit ratings are dropped.

And if the banks are vulnerable to “wholesale market conditions”, the $1 billion extra per month the Government is borrowing will be subject to the same vulnerabilities.

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7 Comments

"(Bank of England's) Mr King expressed sympathy for families hit by the collapse in living standards, which he recently described as the steepest in 80 years. ....I’m afraid I do not see any way out of that – it’s the consequence of the financial crisis and the need to rebalance the economy....The strength of the recovery is likely to be dampened by the fiscal consolidation and a continuing squeeze on households’ purchasing power from the effects of higher commodity prices and [lower] wages,”

New Zealand is in the same boat.

http://www.telegraph.co.uk/finance/economics/interestrates/8328997/Britons-must-prepare-for-interest-rate-squeeze-warns-Bank-of-Englands-Mervyn-King.html

Us and the next generation are now paying the price for the massive consumerism and indebtness in most western societies, especially over the last decade. The consequences -> prices up on many fronts, but wages stagnating- even falling. Standards of living will fall and lead to unrest within societies. The world is changing fast.

Recently, the Reserve Bank gave these trading banks the ok to issue up to 10% of their liabilities as covered bonds. The banks have been piling into them 

So Moody's is saying is that our reserve bank, in all their esteemed wisdom, have made a grandiose cock up. 

Was this AB alone, or did he have help?

Because of this:

They say they are concerned about “structural sensitivities to wholesale market conditions”.  The global financial crisis has underlined the speed with which shifts in investor confidence can impact bank funding, and wholesale funds comprise on average 43% of total liabilities of these banks.

Or do you think the possibility of a bank downgrade is good? Particularly in an already risky fractional reserve banking system.

Covered bonds makes me sick to my stomach.  Standard business for a bank these days is to put the 'bank' back into bankrupt.

The problem is if the banks borrow funds from the wholesale market with short maturities (eg 3- 6 mths or less) and the market freeze as in 2008 and the borrowings can't be rolled. Covered bonds are for much longer terms (5-7 yrs). This is why the RBNZ want banks to have 65-70% of their borrowings with 12mth+ maturities and covered bonds are one way of doing this.

The rating agencies should be looking at the US banks that are borrowing short term at under 1% and lending out for 10 years at 4%+

http://globaleconomicanalysis.blogspot.com/2011/02/next-borrow-short-lend-long-guaranteed.html

Of coarse king can see no way out. There was never meant to be one.

It's obvious this has been a engineered setup.

As always the descerning person should ask...

"Cuo Bono?"

The real AGENDA takes another step forward.

Anyone ever voted for a WTO representative in the great world democracy?

How about IMF UN World Bank?