Sunday, 26 October 2008

Aussie owned banks sourced 40% of funding from overseas - that's the problem

by Peter de Waal Rod Oram in his article, Doomsayers have got it wrong, in the Sunday Star Times (26 Oct 2008) writes: "Still, the banks deserve criticism. They scooped up easy, low-cost credit overseas over the past decade and aggressively lent it to households here, fuelling the debt-driven consumer and housing boom. In doing so, the banks made a mockery of monetary policy. They showed how ineffectual the Reserve Bank's official cash rate is in guiding the economy." "The second argument for impending financial disaster is equally misjudged. Yes, it's true the four Australian-owned banks that constitute 90% of our banking system are heavily dependent on overseas funding. Because we are such poor savers, they raised 40% of their funding as of February this year from overseas sources for a total of $116.5 billion. That was almost a four-fold increase from $33.5b, or 29.6% of their funding, in December 1998. And, incautiously, they borrow short - on average terms of less than a year - but lend long for the likes of mortgages. That wasn't a problem when the world was awash with credit as it was over the past decade. But it has been a problem since global credit markets began collapsing in August last year." When Oram says, "because we are such poor savers", he means NZ's slave-level wages caused by 25 years of attacks on unions and other wage-growth restraint policies has left 80% of the population with no savings safety net. It also means that the rich are worried that there is not a pool of wealth that can be readily tapped to dig the system out of the mire, unlike after the 1987 crash when most households owned their own dwelling and had savings. The fact that the banks "raised 40% of their funding as of February this year from overseas sources for a total of $116.5 billion" is the real worry. As the fake economy of derivatives and the non-existent assets that underpin them (like sub-prime loans) is around six times the size of the “real” trading economy, and the focus of the international bailouts is a pathetic attempt to pay down this fake economic debt at the expense of the real economy, you can only expect it is going to get much harder to borrow money. On Oram's figures I would remove 40% of available capital and do the numbers again and see what kind of interest rates/house prices/economic picture you come up with.

No comments: