Key watching Aussie bank credit ratings as NZ govt downgrade showed how worried ratings agencies were about wholesale money markets

Key watching Aussie bank credit ratings as NZ govt downgrade showed how worried ratings agencies were about wholesale money markets

By Alex Tarrant

Prime Minister John Key is keeping an eye on the credit ratings of the big Australian banks after downgrades to New Zealand's sovereign rating from Fitch and Standard & Poor's last week highlighted how worried the ratings agencies were about international wholesale funding markets.

S&P is currently reviewing the methodology it uses to asses bank credit ratings, with the new criteria due out anytime now. That criteria could potentially lead to a cut in the ratings of New Zealand's big Australian-owned banks - ANZ, ASB, BNZ and Westpac - which are all rated AA. See: Standard & Poor's ratings revamp could see New Zealand bank credit ratings downgraded.

Australian banks and their New Zealand subsidiaries rely on global wholesale money markets for roughly a third of their funding, an exposure that was highlighted by the 2008/09 credit crunch following the collapse of US investment bank Lehman Brothers in September 2008. 

Global wholesale money markets froze in the months following the Lehman collapse, with the Reserve Bank of Australia and Reserve Bank of New Zealand having to step in to guarantee wholesale funding and provide a short term lending facility to help the banks access funds.

Finance Minister Bill English said on Sunday he thought the downgrades to New Zealand's sovereign ratings could add some cost to interest rates in New Zealand, but not as much as the 1-2% feared from a possible downgrade in 2009. See English says PM's 2009 comment that a credit rating downgrade would push rates up 1-2% was right at the time, but it's different now.

Key optimistic

Key was more optimistic about the situation. When asked yesterday what he thought the effect of the downgrades would have on New Zealand mortgage rates, Key replied he did not think they would be affected, at least in the short-term.

Key said NZ bank economists were still expecting New Zealand to attract capital, as it was still in a relatively good position compared with other developed countries that had received downgrades recently.

Speaking to media on Tuesday in Parliament, Key reiterated New Zealand was relatively a good country to invest in as Northern Hemisphere peers had been downgraded as well.

“So capital’s been flowing in. [But] what is also at play here is ultimately what happens to the banks and whether the Australian banks are downgraded. That’s always a risk,” Key said.

Ratings agencies had always been worried about New Zealand and Australia's external liabilities.

"We’re currently sitting at 69% of GDP, Australia’s sitting at 55% of GDP. So they are worried about the wholesale funding in the international markets," Key said.

"Both Fitch and S&P basically say one of the strengths of New Zealand is the Crown balance sheet. But the really important point there is, we need to restore that balance sheet to a healthy position as quickly as we can,” he said.

'80 US cents was always a little high'

Meanwhile, asked where he thought the New Zealand dollar was heading following last week's news, Key said it would be appropriate for him to make a prediction. The NZ dollar traded just above 75 US cents at 1:20pm on Tuesday, down from a post-float high of 88.4 USc at the start of August.

“What I said a couple of weeks ago was there was that there was a better than 50% chance that Greece would default, I stand by that view. If that takes place then obviously that will have some implications," Key said.

“What the rating agencies are telling all of us, is that we just live in a lot more volatile times, and ultimately that will have some impact. But I’d say the markets have priced a lot of this in,” he said.

The exchange rate was a double-edged sword. As it rose there was pressure on exporters, but meant import price such as petrol were cheaper.

“It’s a balancing act. The New Zealand dollar above 80 US cents is always a little high, so at these levels it’s still at reasonably attractive levels from an import perspective,” Key said.

'No parameters, but warnings on private debt'

Meanwhile, asked whether ratings agencies had set any parameters on what they considered the level of New Zealand's private sector debt should be, Finance Minister replied they did not. The government had made its own decision to try and keep net government debt within 30% of GDP, and not the ratings agencies, he said.

"With respect to private household debt, the only position they’ve taken there is they’ve quoted the UK and the US, which have had similar levels of household, or private sector debt, which have dropped faster in New Zealand," English told media on Tuesday.

"In the UK and the US, the reasons for that are reasons we wouldn’t want to have to deal with – they’ve had a collapse in the housing market in the US, and they’ve had big cuts in public sector and transfers to households in the UK. That decrease in household debt in the UK and the US is primarily driven by fear," he said.

In New Zealand there had been a more moderate and considered adjustment, which the government considered the best path to follow.

“We’re not run by the ratings agencies, we do what we believe is the best thing for the New Zealand economy...and they have an opinion about it,” English said.

'Better off without housing collapse'

"With household debt, the government doesn’t have direct control over that. That is a whole lot of decisions made by New Zealanders running their day-to-day lives. The fact is they do respond to a general shift in the environment, and a shift in incentives. So they can see that too much debt’s too high, so they are gradually starting to pay it off. Low interest rates are giving them that opportunity," he said.

"They’re getting a pretty clear message from government because we’ve changed the tax [mix] around to cut the tax on savings, investment and work, and increased the tax on consumption. That’s telling them, spend a bit less, you’ll do better out of saving and out of paying off debt. I think they’re responding to that.

"The ratings agencies might have wanted to see a US-type adjustment, but frankly I think we’re better off without the collapse in the housing market that they’ve had in the US," English said.

(Updates with comments from English).

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Mr Key - isnt it about  time you went on prime time and told the nation " nu zillonders - we gotta start livin within our means cos the lending tap is about to be turned off"

Bernard... et al..  

Can u tell me what the impact of CDS spreads are..????  

Liquidity..???    Wholesale funding..???  Interest rates..???

I notice they are back at 2008 levels... but I don't know what the implications are..???

Thks   Roelof

its means investors are willing to pay more and more for a CDS on these american banks because they percieve the likelihood of the bank defaulting to be increasing with the financial turmoil going on in europe and they want to hedge themselves against that happening... but seeing as how with a CDS you dont actually have to have an interest in the bank to hedge against, it could just as easily be a bet that the bank will default.

not sure if it will do these investors much good.. the thing about the CDS market is that its been totally unregulated. who is issuing these CDSes and will there even be any money left over to pay out on them if a default event is declared?

who knows... to me its kind of like betting against the system, but relying on the system to still be there to pay you out if it collapses. basically these guys are banking on another government bailout rescue package.

CDS can be thought of as a kind of financial insurance.  I pay you an upfront fee to give me a contract that will pay me out a large sum if an event happens.  For example the bank I am doing business with goes bankrupt (defaults).

The spreads going up mean people want more money up front to assume that risk.  They are begining to suspect the risk of that bank defaulting isn't as small a risk as they once thought it was.

Therefore the cost of doing large business with that bank to going up - the idea being the business to too risky to take place WITHOUT a CDS type insurance policy in place.

If the cost gets too high then that bank finds it harder and harder to keep doing it's daily business and meet it's deals on time.  There a lot of these contracts/deals out there and as they expire the cost of putting new deals/contracts in place is getting hard/expensive - and in the end - impossible to do at a profit.

Business for that bank risks being dead in the water.

Ralph: Who are the (main) issuers/writers/sellers of these CDS. You cant buy them at pak'n'save can you?

Bloomberg had an article about CDO's and Australia today

http://www.bloomberg.com/news/2011-10-02/s-p-faces-australia-trial-over-ratings-of-cdos-sold-to-towns.html

and this was a good quote-Don't know if we can get this FT article

The equivalent of putting explosives into a can, before kicking it down the road," writes the FT'sWolfgang Munchau about the idea of leveraging the EFSF to create what is essentially a CDO. Should it fail, there would be no governments left to bail it out. "It is the last confidence trick in the toolbox of the truly desperate."

No you can't.

This might be useful comment, it also has a link to the latest Fed report.

http://isda.derivativiews.org/

AIG was a main issuer of credit default swaps (since heavily bailed out and taken over by the US government), Goldman etc created a market for them and onsold them. You'd probably need to be working for a billion dollar fund to be able to access the markets for them, at least have some good mates in GS.

Another thing about CDSes is that the issuer isn't required to hold any reserves should a default be declared and they are required to pay out on them. No regulation of the CDS market what so ever! Quite unbelievable!

Prior to 2007 the bright minds at AIG thought they were onto the biggest winner of the century, selling insurance on a default event that would never happen! What could go wrong!???

Also nobody knows quite how many CDSes have been issued and how much the US Government is on the hook for if a default is declared. The reason Timmy Geithner is so interested in the euro not falling apart is because through the magic of CDSes the US government now has CONSIDERABLE exposure to any default occuring in europe.

HOORAY........!

Someone out there actually understands this stuff..........

There has been endless mouthing off about "the failure of free markets" etc etc etc by people who haven't a clue how any of this stuff actually worked.

".........Prior to 2007 the bright minds at AIG thought they were onto the biggest winner of the century, selling insurance on a default event that would never happen! What could go wrong!???......"

EXACTLY....! "Property prices can never fall"........!!!!!!

So did "free markets" fail?

Would "free markets" have failed if far too many people poured their money into disaster insurance underwriting because they thought natural disasters had gone into a long term remission?

Blaming "free markets" for this, is like blaming the system of weights and measures itself, per se, for obesity. Or like blaming "powered flight" for airline crashes caused by complex fly by wire systems.

We don't need "less free markets". We need saner, wiser people. Perhaps the biggest problem we have today is that it is so much easier for people to make money to invest, that a lot of unwise people do have money to invest and invest it unwisely. Look at all the idiots screaming to be refunded for their own stupidity every time some NZ equivalent of Bernie Madoff goes belly-up.

Same underlying idiocy: "property prices can never fall".....!!!!

"Our business model turned out to be unsustainable" - Mark Hotchin.

Yeah, because it required 10% per annum capital gain in all property. Same thing for SCF and Serepisos and all the other bubble bunnies.

And this is "the failure of free markets"? Only to people who don't want to admit that they are part of a massive pack of idiots.

 

The term "control Fraud" comes to mind as well..

maybe..? Ostrich....it's an airbourne Turkey shoot out there.....round after round  fired into the hedge just to get em in the open.

Suppose I should add a link to support that statement.....you still in France Ostrich..?

http://www.madhedgefundtrader.com/may-25-2011-2.html

 Ostrich...Good to hear your back for a while at least ...I should like to know more about this Banker even as a retrospective I am sure it would yeild a nugget or two ....

The website I posted for you dates back to may ...but  applies now only with accelerant.!..def worth the read and then on to internal links....almost  prophetic on so many levels. Good luck  stay well..!

John Key 'had a dream' he had made his money now it was to be prime minister. The problem I have is, his dream stopped there, with a bmw limo, royal weddings, opening Wall street and the world cup.

Wish he had a dream for the country, wish he would direct our future, wish he had a plan.

His dream remains incomplete A.J. untill his speech therapist can debug  that God awfull sound he makes during oral outings.

With Nuzullund being at the top of the must fix list....progress is slow..!

Don't forget, he's also got that titular title to come - also a central tenet of the "elitist" dream.

Yes it's a nice story isn't it and one that begs the question.

1: Either the story is a load of made up PR BS to fool the electorate, I mean lets face it, the Banksters would be more than happy to have one of their own running a country right? Way easier than having to try corrupt someone else eh!

2: The reason he has no answers is because he is never had any that were not on the play sheet working to a plan that was already in place well before he became PM. Gotta pay the sponsors somehow! Of course getting to be the PM many have been a variable, but if you follow the politics around him over the years, it was a pretty simple accent

Was some good money to be made on the FX market NZ v US. Wish I had known about the downgrade!

If it walks like a duck, and it talks like a duck, its a duck!

 

Bring on the bank downgardes I say. They are way overdue. Make the b*stards pay more for the debt they raise. It will likely have the beneficial effect of increasing the rates they pay to depositors AND mitigate their attempt to re-inflate the housing market.

Hey stop that andyh .!..I haven't got my uranium yet., let alone anywhere to put it....and the ANZ  may be a little exposed...so you know all in good time.

English's comments near the end of that article are most revealing.

Basically saying, our interest rates are too low and no discouraging borrowers enough. We left interest rates very low to keep the housing bubble semi-inflated so we dont end up like UK and USA.

As a result, our private debt levels have not fallen very much, much less than USA and UK who had comparable levels. This has lead to rating downgrades.

As banks also get downgraded as they have also demonstrated that they are not responsible enough to see the big picture and restrict lending to people already over there heads in debt, we will see interest rates rise independent of OCR. 

This will then stop borrowers borrowing and proping up an inflated housing market, allowing it to finally return to rational/normal levels predicted by fundamentals.

All good reasoning until paragraph three, the Aussie banks will get downgraded if the rating agencies feel the quality of their assets have become impaired.   Responsibility has nothing to do with it, lending is their core purpose for living.

Neither Aussie nor Kiwi governments want to see a housing collapse.

They want to see a modest increase in inflation, say to 3-4 percent whilst housing prices drop in nominal terms by 4-5 percent.  Net result housing drops in 7-9 percent in real terms.

What is to be avoided is the word panic.

Yeah, that is what we need for several years at least, until median multiple house prices are 3 times median incomes again. Then they need to stay that way.

There are perfectly logical reasons why house prices fall into a predictable relationship with incomes, and the total real estate prices fall into a relationship with GDP. It is a simple question of what is "sustainable". When land prices are out of whack with incomes and production, an economy is doomed to multiple negative effects that force it back to the historical norm. Unfortunately this phenomenon can become cyclical and volatile.

It has been cyclical and volatile in Britain for decades. Japan is an interesting counter example - a long, long stagnation as these factors reverted to sustainable levels. Good for the Japanese if they now manage to avoid a repeat. How do they do it and the Poms not? Smarter?

It will help their economic competitiveness if their land prices stay at sane levels from now on. Their urban land is already among the cheapest in the first world, including NZ's.  Come to that, it is cheaper than China's. Why is it so hard for so many people to see low urban land prices as an economic advantage, and inflated urban land prices as a disadvantage?

 Bill English doesn’t want a housing collapse!!! When are they going to wake up to the fact that every day another house is sold at bubble prices it increases NZs long term liabilities and makes it more likely that we will end up being tenants in our land.

 The best thing for NZ in the long term would be an immediate drop in house prices of up to 30%  People are so short sighted and greedy

Bill English not wanting a housing collapse is morse code for "he doesnt want to have to pick up the pieces and bail out the banks". 

There's hope? Bill English in Parliament Question Time today, repsonded to a staged question ( from his own backbench) that 'New Zealanders realise that they can no longer go on speculating in the property market, buying and selling house to each other, and the Government had made attempts to curtail this, and would continue to do so" or words to that effect ( it will be on Youtube, somewhere). So maybe, just maybe, we are starting to see the emergence of Nationals counter to Labor's CGT?

So why is the Auckland housing market hummimg along so well......spoke with an  agent there this morning.....prices risen 4 or 5%...and shortage of listings.

When are we going to see this great bank collapse......the interest rates will go up substantially first surely  or another big bailout?

We will see increases in real interest rates as the off shore cost of finance increases for the banks themselves.  Our banks get approximately one third of their money from off shore money markets.

Things are stable if:

(a) the cost of borrowing for the bank doesn't increase

(b) if the cost does increase the bank doesn't have to roll (renegotiate) their debt at the higher rates

As soon as either of those things happen interests rates will increase in NZ and OZ regardless of the reserve bank rate.  Once assumes this will slow the local mortgage market.

realist - Do you believe what RE Agents tell you?

Nice to see "Realist" above gets it.

The depressing thing about all this, Hugh, is that there is hardly a country in the modern world NOT affected by this unreason, hence there is nowhere for our young to flee, except parts of the USA. And that is harder to get into than Aussie or the UK, both of whom have the same problems as us with Green lunacy making homes unaffordable and dragging the economy down.

This stuff could hardly have been better designed by the KGB in the Cold War as a Trojan Horse policy to destroy the whole free world. It is that pernicious. It works on the greed of all incumbent property owners, of which there are many, to ensure that reform never happens - look at the Poms now.

Hello

There seems to be a lot of doom in gloom an the end off the world stuff going on.

Have you tried toget into a Bunnings or Garden center in the weekend.

They are flat out selling crap that people don't need,this is how the recovery starts.

The work is backing up,this will turn into a building boom.

Everything that is built needs something fixing or replacing.

Leaky homes an old houses all need work.

The work has always been there,keep the interest rates low an people will start to spend again.

"Logic" would dictate that NZ borrowing costs from overseas will now go up, thus increasing mortgage rates, and interests rates across the board,

But...........when you have Reserve Bank Governor and Finance Minister(and probably the PM also) absolutely intent on trying desperately to avoid popping the property bubble in one massive hit for 3-4 years now by artificially keeping the OCR well below ACTUAL inflation, bailing out finance companies using the bogus GGS to the tune of 2 BILLION of taxpayer dollars and pretending we live in some sort of vacuum from the rest of the crumbling global economies then I'd say all bets are off.

Bollard & English have already  tried to blow this over as nothing to worry about too much. Bollard stating "the OCR will probably go up but not in as bigger increments as the past" while English pretended it was private debt that was to blame 'solely' and not all the billions he has been borrowing along with the past lunatic fringe party known as Labour ( something they have no idea of)

Quite simply we have Government CORRUPTION at play here. They constantly refuse to do what MUST be done just to catch a vote or save face. The NZ public need to wake up as do other western nation taxpayers. YOU ARE GOING TO BECOME THE SCAPEGOATS! 

Exactly, exactly, exactly.

We need to do what Iceland did - not what all the other fools did and are doing. Especially the Irish fools, who will be paying at least 10% higher tax rates for at least the next 3 decades, paying off international banks debt that the idiot politicians put the taxpayers on the hook for.

All this artificial keeping interest rates low has to go smash very soon because ultimately we depend on the interest rates at which lenders will lend, not the interest rates at which the central bank will lend out "printed money".

And interest rates much higher than "very low" will tip many mortgage payers over the edge, i.e. most people who bought their first home since about 2004.

But, Iceland had nothing to lose? ( they'd already lost whatever they thought they had!). Ireland and New Zealand, still do. So a debt default, or whatever, isn't an option for us....yet....

".......Please tell me someone can see the outsiders of the system are getting set up to be fleeced to the enth degree?"

Yes.

This is the biggest swindle in human history. It involves a transfer of wealth from future generations of taxpayers. Richer pickings than any swindle anyone has ever designed before. Even Bernie Madoff's victims were people who existed now, whose money was "past earnings".

The swindle that is going on now, will rob people not even yet born, of income that will be earned by them in 20 years.