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The Forum > Article Comments > Why Australian banks are standing strong > Comments

Why Australian banks are standing strong : Comments

By Saul Eslake, published 8/10/2008

Australian banks have generally avoided writing mortgages at extremely high loan-to-valuation ratios.

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This 3 October essay starts with a pollyanna view of the situation but ends with a warning that maybe all is not that well. It contrasts to Michael West's more realistic review in the SMH businessday of 7 October. West writes that 'Australians with a mortgage should check their mortgage documents for what is known as the 'general exit clause'. This basically states that at any time and without default or fault, the bank can ask for the mortgage to be paid out in full. In every mortgage or loan document there will be a clause requiring payment within 30/60 days. If the banks can't get their funding in global markets then the RBA will have to step in (as they have done already to prop up the system). How long can they keep this up given that we have another four years or more of [bank borrowed} mortgage money being called in as it falls due nd our currency being manipulated by major external interests?'
Posted by anzsa, Wednesday, 8 October 2008 10:33:43 AM
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anzsa is right. People may remember what happened last year when RAMS, a second tier bank lender, suddenly found that overseas banks would not lend to it at any interest rate. We will know we are at the bottom of the pit when cba, anz, westpac and national australia experience the same difficulty. However, considering the strength of our banks, it is more likely that they will obtain finance, but at exorbitant interest rates, which they will have to pass on in full to borrowers, or face collapse.

The real problem here is that we are reaping the whirlwind of 35 years of deficit financing, when we have been living beyond our means. Now we will have to pay the piper.

How many people remember that in 1972 we had no foreign debt, and that in 1975 we all swooned when the Whitlam government wanted to borrow $2 billion from overseas?

Keynes said that we are only interested in the short term, because in the long term we are dead.

Napoleon said that when the house is on fire you don't worry about the stables.

Benjamin Franklin said that experience keeps a hard school, but that there are those that will learn in no other
Posted by plerdsus, Wednesday, 8 October 2008 11:28:47 AM
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Yes, for decades we have heard the neo-liberal nonsense, which essentially maintains that " public debt is bad, private debt is good",from now on Australians are going to realize how destructive our enormous foreign debt is and what an illusion the years of "growth" were.Of course the Rudd government will be blamed for the disaster.
Posted by mac, Wednesday, 8 October 2008 1:16:13 PM
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So we all swooned when the Whitlam government wanted to borrow $2 billion from overseas, pierdsus? Well his departmental advisers certainly did. According to Gough Whitlam's own account :

“[T]he re-acquisition and proper development of Australia’s mineral heritage required more money than was available in terms of domestic budget constraints and more money than could possibly be available on the domestic capital market. Moreover and more immediately, the adequacy of Australia's response to the OPEC oil crisis depended on its capacity to develop alternative sources of energy using alternative sources of finance. For these reasons, [Minerals and Energy Minister] Connor was attracted ... to the prospect of borrowing ... Arab petro-dollars" (“The Whitlam Government”, 1985, p. 252).

In pursuance of this objective, Rex Connor sought to borrow $US4,000 million 'for temporary purposes.' The 'shopping list' of 'urgency energy items' on which he proposed to spend these funds, with an indicative order of costs for each item, is given in Whitlam's book.

As Australia's GDP at current prices is now about 17 times its level in 1974-75 when the Minister was chasing billions of petro-dollars, we can put the relative magnitude of the Minister's infrastructure proposals into perspective by a corresponding multiplication of the ‘indicative order of cost' numbers.

On this basis, it can be calculated that Connor's plan was to spend the 2008 equivalent of just over $20 billion on gas pipelines (Cooper Basin to Palm Valley, Palm Valley to Dampier, Dampier to Perth and a submarine pipeline from North Rankin to Dampier). In addition, he had in mind the 2008 equivalent of $12.75 billion on the Government's share of a 'petrol chemical plant' at Dampier, $3.8 billion on three uranium mining and milling plants, $2.6 billion on railway electrification, $3.4 billion on coal hydrogenation, $3.4 billion on upgrading coal exporting harbours and $3.4 billion on re-financing of field recovery in the Cooper Basin.

Mr Connor never offered any explanation of how petro-dollar balances would be transformed into real resources to support the domestic content of his 'urgency energy items’, and his colleagues apparently never asked
Posted by IanC, Wednesday, 8 October 2008 1:52:01 PM
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Plerdsus asks “How many people remember that in 1972 we had no foreign debt, and that in 1975 we all swooned when the Whitlam government wanted to borrow $2 billion from overseas?”

Sometimes there is swooning, sometimes not, over such matters. It varies according to how the media like to play things, rather than the substance of the issues.

The Whitlam government’s attempt was for $4 billion in one hit; and the purpose was in close parallel with what was being done in Queensland by that great socialist Joh Bjelke-Petersen.

Joh had the coal-transporting railways built for, and ownership retained by, Queensland. Whitlam Government’s stated intention was a gas-pipeline reticulation across Australia, ownership to be retained by the Commonwealth Government, funded from a $4 billion loan.

The Whitlam loan attempted to access the tsunami of petro-dollars which had just crashed over the economic scene. The broker for this attempt was Tirath Khemlani. A great fuss around both the loan and its broker erupted in the media, and was maintained in the headlines for months.

Just a few years down the track of Malcolm Fraser’s “sport regaining the front pages”, his Government successfully negotiated a $2 billion loan overseas. It was not for any great infrastructure-building purpose. Just a year, or maybe two, further on, a similar loan was successfully negotiated. All-up, they matched the size of the 1975 loan attempt.

Neither of these exercises rated more than a short paragraph or so of modest statement, within the bowels of the media.

Tirath Khemlani was portrayed in bold terms by the media as a “peanut-eating Arab” of strongly inferred doubtful integrity. The media, obviously disappointed, seemed unable to unearth any malfeasance on his part – neither then, nor later.

However, some years after those Fraser loans, their broker - of fine British stock and “the normal loan intermediary for the Australian Government” according to the media - saw the inside of a British jail for malfeasance. Not very newsworthy, it received a short paragraph . mid-newspaper.

Sometimes who initiates loans attains more importance than its purpose.
Posted by colinsett, Wednesday, 8 October 2008 2:42:58 PM
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'Australian banks haven't bought armfuls of securities based on dodgy American mortgages, as did many of their European counterparts.'

Our banks have had responsible lending practises. The mortgages they present don't have the same conditions as the mortgages given away by Fannie Mae and Freddie Mac. (Which is the Queen Bee of the impending economic catastrophe.) Most don't have the same, 3 year for Sub-Prime and 5 year for Alt-A, low start interest repayments or postponement of principle repayments. Nor is the liablity limited just to the property.

My doubt is in regard to our banks foreign investments. I am sure I read somewhere this week the NAB had a liability of $100 Billion in these loans. Given our banks total overseas debt is net $0.6 Tillion. How much of our $1.06 Trillion gross debt (March Quarter) is offset by our Banks investments in now almost worthless US loans? How much is the total of their overseas investment in US Sub-prime and Alt-A loans and what proportion is it to their foreign borrowings?

For it is the extent of the Alt-A loans, Prime loans, not the Sub-prime, that have bought the economic disaster firstly to Lehmanm Brothers and then to the rest of the world.
Posted by keith, Wednesday, 8 October 2008 2:51:47 PM
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Yesterdays 1% interest rate reaction is panic inspired and akin to throwing a stone into a tsunami.

In my semi-imformed and under-educated opinion if our net debt goes over $1 trillion it would be reasonable to expect a foreign run on overseas investment in Australia and even with only their current debt, some of our Banks will collapse.

I believe with our current and even falling terms of trade, with the now expected reduction in imports and exports and even with a falling dollar our Banks $0.60 Tillion debt is still manageable. With a foreign debt at $1.06 Trillion our Banks won't be able to repay for years, if at all, and no amount of taxpayer bailout ... well work it out ... we'll have become Keating's banana republic.

Deliquencies and defaults will arise in that climate but not from the family home. It will rise from negatively geared rental properties and incomplete development housing projects, with the possible exception of retirement complexes. Simply interest rates will go up as rent returns trend down and as unemployment employment increases ...

Support the Banks margins? It is a mistake and utter rubbish. They are a greedy bunch of bastards who might well have let greed get the better of them and might well have sent anyone who owns Australian assets or debt broke. Swan and Rudd are perpretrating a false support for the banks and it is akin to the Democrates in the US who initiated Fanny Mae's lending policies and refused to rein them in. As the dishonesty spread in the US the same will happen here if Rudd and Swan's, at best error or at worst outright dishonesty, aren't challenged. I give them the benefit of the doubt, because of their inexperience and reliance on advice from Banking experts, and think error not dishonesty.

When our interest rates go up over double in the next few months we'll all realise the true extent of the problem ... we won't be able to avoid seeing it, as do most of the current commentators and spinmisters.
Posted by keith, Wednesday, 8 October 2008 2:51:59 PM
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The way to go is to avoid the mantra of globalisation and stick to fundamentals like manufacturing and sound ecomomic principles.

Its sad to see what derugelation has done to the world economy. The "free trade" is not about being free and fair, it is about the big corporations coming together to suck as much as they can from the the public and poor countries.

The present bail-out is nothing but more than “socializing the costs while privatizing the profits. The bail-outs appear to help the financial institutions that got into trouble (many of whom pushed for the kind of lax policies that allowed this to happen in the first place)".

Watch or read Lori Wallach on "free tarde" and Martin Khor on the debt crisis.

http://www.globalissues.org/video/728/lori-wallach-free-trade-how-free-is-it
Posted by Philip Tang, Wednesday, 8 October 2008 7:34:16 PM
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Top post from ansza - West was vindicated completely. The real clinch is the line containing "we have another four years or more of [bank borrowed} mortgage money being called in". Such cute squeaky elephants as those just never turn up in the graphs or news photos of the markets. Ssssshhhh! Don't wake the elephants - they're napping in that remote cabin with a certain Sir Alan Greenspan.

Still, Saul's just doing his job really. Pity the same cannot be said about the established petals in government and diplomacy. This seems set to become a major issue now that non-British EU states are already jumping out of Maastricht like rats from the good ship SS Globalization.

Notice the recent overtures about wanting to insulate Oz within some China-based economic orbit? This after repeated efforts to the contrary in trying to interdict Chinese dealings with Indonesia, East Timor, PNG, Solomons, Vanuatu, etc. Then there are those lovely free-market, neolib enterprises targeting Zimbabwe and Sudan. Hmmmm, nice!
Posted by mil-observer, Thursday, 9 October 2008 9:53:38 AM
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There are so many differing opinions in all this and I find it all a bit scary. I don't have a mortgage, but I'm not sure that matters if things are going to get as bad as some people think.
Posted by jen81, Thursday, 9 October 2008 9:59:08 AM
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Unlike many government economists, Saul Eslake has a clear-eyed understanding of how cross-country comparisons of output should be made. Speaking on ‘China and India in the World Economy and its Implications for Australia’ at Monash University on 29 September 2005, Saul pointed out that China’s economy, correctly measured using purchasing power parities (PPP), was the world’s second largest economy in the world.

In that context he had the good sense to cite a paper by Ian Castles and David Henderson (‘International Comparisons of GDP: Issues of Theory and Practice’, ‘World Economics’, Jan-Mar. 2005) which asserted that exchange rates are not relevant to cross-country comparisons of output. We documented the fact that the contrary belief had led to serious errors by, among others, the IPCC, World Bank, IMF, OECD, IEA, UNDP and UNEP.

It is probably not a coincidence that Eslake’s presentation was made just a fortnight after Prime Minister Howard had told the Asia Society in New York that ‘Japan remains the world’s second largest economy and Asia’s largest economy by a substantial margin’, and that ‘China WILL likely surpass Germany to BECOME the third largest economy after the United States and Japan’ (EMPHASES added).

Surprisingly, Ross Garnaut is also a victim of the exchange rate fallacy. His Review’s Draft Report, released on 4 July, asserted that:

“In the first quarter of this year for the first time since the beginning of the First World War average incomes and output in Australia measured in the standard ways were higher than in the United States.”

Since the first quarter of 2008, the exchange value of the $A has declined from 91 to 68 US cents, so according to Ross Garnaut’s ‘standard ways’ of measuring output, our economy has just suffered a massive reverse.

The PPP-based estimates of Angus Maddison (the best that we have) tell a very different story. They don’t exhibit such huge short-term fluctuations but they do show that Australia’s output per head has exceeded that of the US since World War I - in 1933, the year that FDR took office as President of the United States
Posted by IanC, Thursday, 9 October 2008 12:45:14 PM
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Keith, up till 'oo2 I myself as a learner was taking groups on a study from Murdoch Uni' called The Changing Global Political Economy which changes its focus gradually every year to naturally keep in touch.

Though increasing age and my wife very ill and her death over two years ago, has left me less interested, I have just discovered that I had filed three years of the course up till 'oo2.

Would you beieve the first file I pulled out is headed -
The Dangers of Economic Globalisation, and points out how with free-market linkages a financier like Soros could bring the whole financial world to ruin.
Posted by bushbred, Thursday, 9 October 2008 12:54:26 PM
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Saul.
The banks have proven their worth lately.
Through their services and their in-house processes of human resource management, promotion and the like; basically worldwide, a set have been emplaced who have stuffed up bigtime.
It is on the face of the record. Greed has replaced sustainable enterprise.
The newbies haven't a clue about what makes the world tick simply because their instructors exploited an essentially non-complaining resource.
Simplistically, the greedy baby-boomers.

Now is a good time to make for change.

Let it happen, put greed aside, and permit the rest of the upcoming world to at least influence your decisionmaking.

Admit the carbon trading bubble has burst even before it began.
Pipe down, admit it, get down from that pile of ashes -

'Cos economic warfare is not a joke and these last few weeks we have suffered as the target.
With what has happened in the US, the price of fuel and food - staples prices should have dropped remarkably.
That is not happening. Why Not?
Posted by A NON FARMER, Thursday, 9 October 2008 8:31:07 PM
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Three cheers for non farmer! At last someone added the point about the hitherto intended carbon/fart bubble, and its apparent still birth, as a perpetuation of Greenspan's idiocy-posing-as-genius.

I gather non's questions were a rhetorical device ("staples prices should have dropped remarkably. That is not happening. Why Not?").

Well, if anyone had not figured the obvious, here's why not: masses of new paper coming onto the market from bailouts, then piling higher by coordinated interest rate cuts.

Welcome to Weimar. We need a political solution desperately, but the only semblance of "solution" prepared is fascism (think anti-terror legislation).
Posted by mil-observer, Friday, 10 October 2008 7:35:47 AM
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Dear Mil-Observer,
Re - your's above.

I gather non's questions were a rhetorical device ("staples prices should have dropped remarkably. That is not happening. Why Not?").

My reply -
My question was - Absolutely Non - rhetorical at all. Bless you for asking.
Now, how about some feedback from others too - or your own expanded ideas.

A pal of mine who lives in an allied Nation State but somewhere in the ME wrote me the other day expressing the view that Australia should be playing her cards well and extracting huge benefits from the last few weeks of Wall Street Crash.
Fuel and commodities should be at base price, available as a boon to those in industry - but especially for the wage earner and those less fortunate in the scale of things.

Now here is the real issue - "Welcome to the Weimar" - as you said.
I like the way that paints the background of the emerging landscape.
What will fill in the details of the final work is brushes made of worthless cheques - Be aware that we're all trying to paint a picture here.

Come on someone - extend that scenario instead of whimpering about immediacy and greed!
Posted by A NON FARMER, Sunday, 12 October 2008 7:58:34 PM
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Saul,

With maturity transform in times of lowing interest rates Banks will hold billions in term deposits after the rates fall. This scenario also puts a strain on the banks. High old rates are paid: low rates are received.

Also, I suggest that the Wealth Management Industry has much to answer for... Sucking peole in without disclosing the involved risk.

Relatedly, I recall about three-four years ago in a forum debating with the HSBC Chief Accountant in Hong Kong; wherein, I raised concerned about the US sub-prime housing and the negative affect maturity transformation when there is downward pressure on rates. Even when I pressed him, he just wouldn't admit to the significance these factors.

With a 150 high income people in the audience, invited to seminar, he tried to deflect me.

After a few exchanges, he said, even if US Bank profitability fell, "that the US economy would not be affected by Bank profitability". Was he a con-artist or a fool? I am sure that the HSBC is not alone. How can we trust the Banks?
Posted by Oliver, Sunday, 12 October 2008 8:55:23 PM
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Saul,

Post Script: Banks didn't always rely as heavily on wholesale funding, instead on retail deposits. When liquidity was tight CCDs were endorsed.

O.
Posted by Oliver, Sunday, 12 October 2008 9:05:19 PM
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Hi A NON FARMER,

I like your independent style - kinda makes me want to just say "non"!

Yes, I probably seemed too offhand there. In part I was referring to the huge derivatives zeppelin about to come crashing and burning on the house of usury. But note that my call of "hyperinflation" is probably more about stupidity and dishonesty than "greed", while the "immediacy" of that obvious danger seems to be taboo in our media. So I was not "whimpering" at all - just trying to reorientate ourselves with a clearer view of the facts and dynamics of this mega-crash.

Unfortunately many of us seem to be following certain monetarist "bouncing balls" that have little, no, or only very temporary relevance to events now. I suspect that your friend in the ME is similarly disposed, because his perspective apparently hinges on the same narrow scope of self interest that has helped fuel the various bubbles.

Perhaps some late gamble on resources could help someone to survive or even dominate later on. From the scale of the calamity I do not think it will, but that would become a political question about how any reorganized system treats previous notions of commodity value. Again, I would pause long before assuming that any paper (or even precious metal) will necessarily carry on - the selective and quixotic bail outs suggest that too. Then for Australia there are strategic matters of alliances and related contracts (real and imagined).

While state "leaders" and their financier bosses (western in particular) keep dithering and trying to pump up their badly punctured tyre, they commit themselves inadvertently to the more desperate, brutal and compatibly stupid "solution": fascism. That is where they seem headed, especially with the raft of anti-terror legislation, as portended by Brown's nasty, fraudulent trick on Iceland, which came after my previous post's mention of "think anti-terror legislation".
Posted by mil-observer, Sunday, 12 October 2008 10:07:40 PM
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