Australia Needs To Act With Global Policy Makers To End Sovereign Bank Guarantees

Post by Sharat on July 23, 2009 · Under Australian Economy, Business News, Capital Markets, Company News, banking, interest rates · Comment 

Market analysts have sounded a warning which is growing increasingly louder by the day, that Australia needs to be part of a coordinated global effort to provide an exit strategy from the policy of government bank guarantees, rather than leave large domestic financial institutions exposed to capital outflows.

Andrew Chick, head of corporate finance at UK lender Royal Bank of Scotland (RBS) said that economic incentives remained for Australian lenders to issue sovereign guaranteed paper in both international and domestic debt markets, regardless of the fact that global investors had shown an increased appetite to hold instruments under no guarantee which carried a higher a yield.

In May, National Australia Bank (NAB) became the first of the Big Four banking groups to break rank and issue non guaranteed debt on an international market. NAB raised 500 million Sterling and the deal earned positive sentiment from investors.

RBS whose bankers gave a briefing on Wednesday said that any effort to remove sovereign guarantees would have to be a coordinated global effort and the Australian regulatory authorities would have to act in concert with international counterparts from other countries, when the guarantee scheme was finally lifted.

“We need a global coordinated effort coming out of the guarantee. It was an all-in-together approach going into this and it is going to have to be an all-in coming out of it. It was a different context coming into the guarantee; there was an emergency needing to be fixed and the consequences could be thought about later. But coming out of it, there’s plenty of opportunity to discuss and debate the right way to do it.” Mr. Chick said

Mr. Chick said that there had been very little indication that leading governments with sovereign guarantees in place would lift the policy in the near future, and that financial markets were operating with the expectation that the measure would continue to remain in place for at least the next six months.

“I don’t think it’s imminent but people are starting to think about it now. The banks want to demonstrate they can do an unguaranteed deal. They want to be able to re-engage with the unguaranteed investor base. We might start to see the machinations come into place but I doubt it would be in the next six months.” Mr. Chick said.

Chad Karpes, RBS director of syndicated finance said that the primary market for corporate bonds was starting to become more robust, but issuers who had refinancing issues were still looking at traditional bank balance sheet lending rather than rolling over debt into a new issue.

“The problem with the corporate bond market in Australia is that for the top corporates they don’t really need the funding at the moment, and when they do they have strong banking relationship group already. Also for the top corporates there has not been the pricing convergence between bank debt and the bond market to attract them to the bond market. That will happen before time, but I do think it will take some time.” Mr Karpes said

The RBS banker suggested that more “household” names would start to issue debt securities which would be primarily aimed at the retail investor.

Recently Tabcorp and AMP both issued debt aimed at the retail investor base.

“I think it does need to be a household name that is synonymous with retail investors, It does need to be known, I think that is critical the investor base.” Mr Karpes said


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