Three months ago the possibility of a European break-up was real but an outside chance. Last week a survey by Bank of America Merrill Lynch of international institutions showed that a European crisis was now the outcome considered most likely by a majority.
All Australians need to understand that if the institutional majority is right – and out of a European crisis there is a break-up of the euro – then there will be a banking crisis in Australia.
To the Australian banking system’s great credit, it is a crisis that all the local banks have planned for. But, until now, it seemed unlikely that those plans would be required to be implemented. And I emphasise that a euro break-up is still no certainty and even if does happen the break-up is probably more likely to occur in 2013 than 2012.
But one by one, banks in Australia are starting to implement parts of their emergency plans. The European banks are major players in the global wholesale lending market and they are significant funders of about 40 per cent of Australia bank loans. Those European banks are going to incur substantial losses on a euro split and will no longer be able fund Australian banks.
Australia’s wholesale overseas borrowing is spread over three years so over the next three years Australia’s big banks – which fund about 60 per cent of their loans locally – probably have to lift that percentage to 80 or 90 per cent. The money to fund the difference is in the Australian superannuation movement, led by the self-managed funds with 35 per cent of the market.
According to London’s Daily Telegraph, the Bank of America Merrill Lynch survey has picked up a sudden crumbling of confidence in the eurozone core, which is not yet reflected in bonds and shorter-term interest rates.
Perhaps surprisingly, France is viewed as the country most likely to deliver a nasty surprise later this year. The survey shows that the US 'fiscal cliff' and China’s property slide are far less important to the global institutions.
Most of the publicity about the European crisis is concentrated on Spain and Italy but in some ways of greater significance is the increasing exposure of the German central bank to Europe via the Bundesbank loans to the European central banks. In effect the Germans are funding the deposit exodus from banks in Greece, Portugal Spain and Italy.
The general view is that Germany will not be able to keep this up for much more than a year, by which time Germany will have exhausted most of its reserves. There is currently a court battle in Germany to try and stop the exodus of the wealth of Germany to fund Club Med.
Meanwhile, France’s new president, Franois Hollande, is snubbing the Germans by raising the French minimum wage, employing 60,000 new teachers and clinging to a largely unreformed state that takes 56 per cent of GDP.
That will make it harder to sell more austerity to countries like Spain, where the middle class is now joining the queues for food as unemployment really bites. Some police actually joined recent protests.
Here in Australia I alerted Business Spectator readers to the higher deposit rates being offered by RaboBank and National Australia Bank via its UBank arm (A deposit war to trump the euro battle, July 16).
After that commentary Rabo lowered its rates but quickly restored its 5-year rate to 5.8 per cent. National Australia Bank via UBank is offering rates above 5.1 per cent for three-month, six-month and nine-month currencies, topping at 5.3 per cent for one year. There is a bonus rate if you renew on maturity.
Westpac, via BankSA has lifted its two to four year rates to 5 per cent or above. The five-year rate is 5.3 per cent.
The essence is that all the banks have moved their estimation of the European break-up from an unlikely event to one much higher up the danger scale. With Rabo, NAB (via UBank) and Westpac (via BankSA) showing the way, most of the banks are now negotiating on term deposits.