Category: Australia & NZ

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IMF: Australia's banks need more capital

The IMF identifies risks to Australia’s banking system:

  • Residential mortgages are banks’ single largest asset, and a combination of high household debt and elevated house prices increases the risk in this portfolio.
  • Banks rely on funding from outside the country, and with the crisis in Europe and the global economy suffering, these funding sources are volatile.
  • Four major banks dominate the banking system, and they share many similarities that can be a cause of risk spreading from one to another in the event of a crisis.

……The four major banks are systemically important which means difficulties in any one of them would have severe repercussions for the financial system and the economy. A higher minimum capital requirement would provide a bigger cushion against potential losses.

Capital ratios may under-state capital requirements through risk-weighting assets. Past performance is not always a good predictor of the future. I prefer FDIC director Thomas Hoenig’s unweighted comparison of tangible assets to tangible equity.

via IMF Survey: Australia’s Banks Sturdy, Closely Connected.

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Why is Australia paying Japanese prices for natural gas?

Australian-born chairman and CEO of the Dow Chemical Company, Andrew Liveris, talks with Alan Kohler on ABC Inside Business about the US fiscal cliff and why Australia needs a cohesive energy policy.

“We have to create an infrastructure such that we can have gas-on-gas on competition domestically. If you build the infrastructure, and private sector can do it, and allow shared pipelines, if you build it you will get a domestic gas system and a pricing system that defies the oil gas parity pricing that countries like Australia should never have. If you have the resource in your country, you shouldn’t be paying the highest alternative price of the country that doesn’t have the resource. Why are we paying Japan energy prices when we have domestic gases?”

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Euro recovers

The Euro is testing its long-term descending trendline in response to the weakening dollar. Breakout above $1.315/$1.32 would confirm the primary up-trend signaled earlier by 63-day Twiggs Momentum recovery above zero.

Euro/USD

* Target calculation: 1.315 + ( 1.315 – 1.265 ) = 1.365

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Aussie Dollar tests $1.05

The Aussie Dollar found short-term support at $1.04 and is testing medium-term resistance at $1.05. Breakout would indicate a test of long-term resistance at $1.06. Oscillation of 63-day Twiggs Momentum above zero suggests a primary up-trend. In the long-term, breakout above $1.06 would offer a target of $1.10* but the RBA is likely to take measures to counter further appreciation.

Aussie Dollar/USD

* Target calculation: 1.06 + ( 1.06 – 1.02 ) = 1.10

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Australia: ASX 200 resistance

The ASX 200 encountered resistance at the descending trendline — around 4450. A sharp rise in 21-day Twiggs Money Flow indicates short-term buying pressure. Breakout would indicate a primary advance to 4750*. Retreat below 4400 is less likely but would suggest a decline to 4250.

ASX 200 Index

* Target calculation: 4550 + ( 4550 – 4350 ) = 4750

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The “Export Price Norm” saved Australia from the Great Recession « The Market Monetarist

The Market Monetarist writes how a combination of luck and good policy saved Australia from recession.

Milton Friedman once said never to underestimate the importance of luck of nations. I believe that is very true and I think the same goes for central banks. Some nations came through the shock in 2008-9 much better than other nations and obviously better policy and particularly better monetary policy played a key role. However, luck certainly also played a role…..

via The “Export Price Norm” saved Australia from the Great Recession « The Market Monetarist.

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Australia: Housing affordability still poor

Interesting article by Leith van Onselen on Australian housing affordability.

Today it takes “380 weeks on the average wage (just over seven year’s income) to buy a typical house. This is down from around 430 weeks average wages (just over eight year’s income) required to buy a home in 2008 and 2010.”

Good news. But compare that to less than 250 weeks in 1995 — and less than 200 weeks in 1987.

In 1960, it took homebuyers just 7500 hours [188 weeks on the average wage] to pay off the average mortgage.

via Housing affordability improves but still poor | | MacroBusiness.

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Health Costs: How the U.S. Compares With Other Countries | PBS NewsHour

US health care costs are high relative to other OECD countries but average US life expectancy (78.7 years) in 2010 is below the OECD average of 79.8 years. These two OECD charts sum up the problem:

OECD health spending by country

Cost of medical procedures

Germany (DEU) is lowest for most procedures — in many cases less than half — and the quality of the treatment is excellent.

via Health Costs: How the U.S. Compares With Other Countries | PBS NewsHour.

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Euro and Aussie Dollar long tails

The Euro reversed direction in response to the weakening dollar, breaking resistance at $1.28 to indicate another test of $1.31/$1.32. Respect of the new support level would confirm.

Euro/USD

The Aussie Dollar likewise displays evidence of buying pressure, with long tails below resistance at $1.04. Breakout would offer a target of $1.06*. Reversal of of 63-day Twiggs Momentum below zero, however, would warn of a primary down-trend.

Aussie Dollar/USD

* Target calculation: 1.04 + ( 1.04 – 1.02 ) = 1.06

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S&P declares Australia a “one trick pony” | macrobusiness.com.au

By Houses and Holes on November 22, 2012

One-Trick Pony

London-based Kyran Curry, the long-time primary credit analyst for Australia at S&P, is back and the news is getting worse. From the AFR:

“The banks are highly indebted, they’re highly leveraged, they are the main vehicle Australia uses to fund its current account deficit…Australia has, as we see it, got some credit metrics that are right off the scale when it comes to assessing Australia’s external position….It’s got high levels of liabilities, it’s got very weak external liquidity and that basically means the banks are highly indebted compared to their peers….They’re benefiting from a safe haven at the moment – nonetheless investor sentiment can turn very quickly…We just worry that at some point, the people who are funding the Australian banks may decide that enough is enough and may begin to lose confidence in the bank’s ability to roll over their debt….That would come through a weakening in Australia’s major trading partners flowing through to a dramatic weakening in Australia’s fiscal position.”

Curry said this could be a two or three year scenario. But he added:

“Anything that weighs on the ability of Australia to bring forward new energy projects and that weighs on its export growth potential, that’s something that would put pressure on the rating. Australia is looking increasingly like a one-trick pony.”

Regular readers will note that S&P has pretty much captured my entire ‘peak Australia’ thesis. It is simultaneously ripping aside the veil of invisopower that regulators have dispersed around the banks and seeing for it is the singularly backward macroeconomic strategy of embracing Dutch disease. My two great fears.

The last line is the worst. I am of the view that LNG will rationalise – the current set of projects that is – not the fictitious pipeline. That means there is a risk that this is not a two or three scenario at all. Which does offer an answer to the question: why is S&P ramping its warnings now?

Canberra must immediately dispatch to Beijing a high level delegation to demand further stimulus. Perhaps a high-speed rail link from Beijing to the Bush Capital? That way, when they’re ready, the Chinese can relax in comfort on the way down to buy our banks.

Reproduced with thanks to Houses and Holes at Macrobusiness.com.au

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