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Kevin Rudd Relents, Offers Funds A Deal
The Herald Sun is reporting that Prime Minister Kevin Rudd last night gave major fund management companies the option to apply for the same guarantees that were made available to banks and their deposits. The move is designed to give thousands of Australians access to A$ 25 Billion in frozen life savings.
On October 12th, in an effort to calm skittish financial markets proposed a blanket guarantee on Australian bank deposits and offered to act as guarantor to Australian banks when they tapped international wholesale money markets for funding, effectively assigning sovereign risk to those banks.
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Major Banks May Have to Forgo Guarantees
Australia’s major banks may have to forfeit Government guarantees on its debt because perversely the effect of the guarantee is to lower the cost of their funding which results in investors preferring to hold higher yielding securities instead.
The Australian financial system continues to see distortions in the way it functions as the impact of the blanket government guarantee on all deposits and international wholesale funding by Australian banks affects the system in more and more unforeseen ways.
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Aussie Dollar Could Fall Below 60 US cents
The Aussie Dollar traded at or near five year lows yesterday though it has since rallied today, though some currency strategists that say the Aussie could slip below 60 US Cents and test new five and a half year low as fears of a global recession continue to pressure the currency.
The Aussie dollar base jumped over the weekend against the American currency as global equity markets and commodity prices went into freefall last week. The unit has since come off its lows as the Dow rallied 10% overnight causing Asian markets to mirror those gains to some extent, easing selling pressure on currencies which have precipitously fallen against the US dollar.
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Westpac Banking Second Half Take A Hit, Full Year Up
Westpac Banking Corp, the second largest Australian bank by market, took an 8.5% hit on its second half profits, as provision for bad debts increased. Full year profits did however rise by 11.8%.
Net income for the six months ending September 30th fell to A$ 1.66 Billion from A$ 1.81 Billion a year earlier. Full year cash earnings though, the bank’s preferred measure of profitability, rose to $3.73 billion in the 12 months to September 30 from $3.51 billion the year before. Full year net profit rose to $3.859 billion, as revenue grew by 12.3 per cent to $11.420 billion beating the median estimate of 16 analysts surveyed by Bloomberg.
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CBA Unit Colonial Suspends Withdrawal
Colonial First State Investments suspended redemptions in its mortgage funds joining a growing group of Australian fund managers that are no longer allowing investors to withdraw their funds due to the distorting effects of the Australian Federal Governments deposit guarantee. The decision affects the retirement savings of some 60,000 Australians, whilst payments to 500,000 pensioners will have to be reviewed, according to The Australian.
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NIB Rejects Bid, Shareholders Livid
Australian Health Insurer, NIB yesterday rejected an unsolicited bid for its business which was double its market value saying that it was inadequate. The bidder who remains a mystery due to a confidentiality agreement is said to have bid between A$1.15 to A$1.20 a share, valuing the health insurance company at around A$621 Million, almost twice the value of the company at the close of trading on Friday.
The unsolicited bid had the effect of putting a floor under the stock price of NIB and its shares surged some 14%. NIB stock still trades as a discount to its listing price, CEO Mark Fitzgibbon said that the bid was rejected because it undervalued the company. “The board has a view of the intrinsic value of the business based upon our own modeling, and based upon recent comparable transactions like the Manchester Unity sale and the Australian Health Management sale,” Mr Fitzgibbon said.
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Treasury Working to Extend Guarantee for Funds
Treasury department officials are busy preparing options for the Government that would give it the ability to extend the bank guarantee to some cash management funds. The move is designed to have the effect of halting large scale redemptions, and ease the pressure on fund managers and allow management companies to free up investor funds which have been frozen in the wake of the Government guarantee.
The Australian is reporting that funds would have to open their books and prove that their assets are high quality and regulators would then assess whether the guarantee should apply to those funds.
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AXA and Perpetual Freeze Aussie Funds
Insurers Perpetual and AXA froze funds held by policy owners and investors as confusion intensified over the Federal Governments intervention and guarantees. Both Perpetual and AXA froze about A$ 4.1 Billion in assets of retail investors.
The suspension came as the governments ill conceived blanket guarantee on all deposits which was both uncapped and not extended to those financial institutions that are deemed to be foreign has started to distort the financial system.
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Australian Federal Deposit Guarantees Capped
The Australian Federal Government on Tuesday conceded to RBA concerns that the governments blanket guarantee on all Australian bank deposits was distorting the Australian banking system. The Government added an insurance premium for wealthy depositors with savings of over A$ 1 Million.
The Government had initially proposed a fee that would be charged to banks that made use of Government funding guarantees for wholesale money market funding. This measure was put in place to prevent banks from becoming to dependant on lower than normal funding rates that the guarantee enables. The Government however remained ambivalent about the deposit guarantee and indicated that uncapped guarantees would remain in effect for no fee.
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Government Guarantees Causing Problems
The Kevin Rudd Government last week rushed to undertake some measures which were designed to re install confidence in the banking system. Last week the PM guaranteed all deposits in Australian banks for up to 3 years. He went further and also guaranteed the borrowings of all Australian banks that borrow money in the international wholesale money markets. The idea behind the move is to build faith in the system and keep Australian banks competitive against European lenders that have undertaken similar measures.
Reserve Bank of Australia (RBA) Governor Glenn Steven’s has been warning the Prime Minister that the blanket guarantee is causing serious dislocation in the financial system and needs to be modified.
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