Could the lending cupboard soon be bare? Gottliebsen

The fact that the big German and French banks are hiding massive losses on their sovereign debt gambles, and have lost much more than their capital, is having strange repercussions in the Australian interest rate market.

It is a reminder that we are much closer to the European crisis than we think. Credit looks like being very tight in 2012 because global capital is fleeing European banks as fast as it can and is looking for paper that carries no risk whatsoever.

And so Australian bond yields are now down to an amazingly low level – three-year bond yields are below 3.2% and 10-year Australian bond yields are just 4%. Remember that our cash rate is 4.5%. It is rare to see Australian bonds so far below the cash rate. But overseas, BHP, the big Australian, is able to borrow at just 1.2% for three years – substantially less than the Australian government but the BHP borrowing currency is US dollars. Nevertheless, this shows that in overseas terms our rates are still high, although offshore investors would have to pay for currency protection.

By contrast, Australian banks are finding the going tough. As Stephen Bartholomeusz reported yesterday, Commonwealth Bank pulled its covered bond issue because the interest rates available were too high.

Australian banks are finding wholesale borrowing overseas is now much more costly and they have some big roll-overs looming next year, so Australian bank interest rate costs will rise. The banks will seek to recover that additional cost from borrowers but there will be great pressure for them to take it on the profit line. On the other side, the Reserve Bank board will again need to ignore the ‘high interest rate zealots’ among its advisors and lower official rates. The zealots were wrong a few months back when they stupidly pressed for higher rates and they will be wrong again if they try and hold the current official rate.

But, again, Wayne Swan may shout outrage, but mortgage holders will only get a portion of the interest rate cut because of what is happening in overseas markets.

Worse still, banks may not be able to gain the overseas money they seek at any reasonable price as the massive losses incurred by European banks contract the global banking market. That means that although Australian banks are very liquid, they may have to go out and bid up local deposits. Fortunately, they have the Reserve Bank behind them.

Stephen Bartholomeusz pointed out yesterday that an incredible $80 billion in corporate loans – a lot of it in listed property trusts – mature in 2012.

Much of this money was arranged just after the global financial crisis and directors thought that by 2012 the crisis would be over. Instead, we are back into a global crisis.

With the deposit-starved European banks desperate to get money, they will withdraw as much money from the Australian market as they can at a time when the Australian banks are being squeezed.

At the same time, the Chinese have slashed their buying of Sydney and Melbourne apartments.

You can now understand why stock markets around the world are in decline. BlueScope bit the bullet yesterday with a heavily discounted share issue. Listed property trusts and others who have short-term debt exposures will have to do likewise. The sooner they bite the bullet the better, because those at the end of the queue may find the cupboard is bare.

This article first appeared on Business Spectator.