Fog descends on global markets
AUSTRALIAN banks are preparing for a potential freeze in global funding markets as Europe's worsening stresses threaten to send the world's financial markets into a tailspin.
AUSTRALIAN banks are preparing for a potential freeze in global funding markets as Europe's worsening stresses threaten to send the world's financial markets into a tailspin.Renewed funding pressures for the big banks, which need to raise $16.3 billion over the next two months, are likely to make it tougher for business and some consumers to access credit.But the upside is that economists are now tipping the Reserve Bank could slash interests rate into next year.Investment bank JPMorgan is forecasting the official cash rates could fall to two-year low of 3.75 per cent by March. Just this month the Reserve Bank cut the rate 25 basis points to 4.5 per cent, to bolster growth.Renewed concerns over escalating European bond yields and potential problems in a bailout of Belgium's Dexia bank flowed through to equities markets yesterday, with Australian shares slumping 1.98 per cent. Resources and banking stocks were the hardest hit as weak Chinese manufacturing data also weighed on sentiment.The Australian dollar last night fell to US97.6?, down almost US1? cent over the day. It has now fallen US9? in just over three weeks as investors flock back to the US dollar, a traditional "safe-haven" in times of trouble.Australia's 10-year bond yield hit a low of 3.88 per cent, close to its record low of 3.84 per cent in January 2009.Commodity prices, which have endured sharp falls in recent weeks, rebounded yesterday. Copper prices soared 30 per cent and iron ore prices followed, gaining 28 per cent.Finance executives from at least two of Australia's big banks have reviewed forward funding plans. This has involved shelving scheduled raisings, with the focus to remain on "opportunistic" fund raisings in US and Australian capital markets.Australia's four major banks need to refinance a total of $48 billion in bonds by June next year, according to figures prepared for BusinessDay by Deutsche Bank. Of this, $16 billion needs to be refinanced by the end of January, the figures show.One bank treasury executive said his view was that funding markets would be "effectively closed" over the next month given the cost of wholesale money was too high.Commonwealth Bank this week pulled its inaugural covered bond issue given volatile pricing made the cost of the raising too high.Australian banks are expected to borrow up to $100 billion from global markets this year, to make up for a shortfall in their deposit base. Deposits cover about 70 per cent of their lending book, although during periods of fast lending growth this figure has fallen below 50 per cent.Unlike the funding freeze following the collapse of Lehman Brothers in late 2008, Australian banks are cashed-up after being able to build their deposit base over the past 18 months. Slowing demand for credit has also reduced their need to raise funds from offshore markets.Macquarie Equities analyst Michael Wiblin said the "significant" increase in cost of raising funds on global money markets could cut as much as 1 per cent from bank profits this coming year.He said there was likely to be some "scope for banks to reprice" loans, although they would first have to accept some crunching to their profit margins.The Spanish government was forced to sell three-month bonds at a price to yield 5.11 per cent, more than double the 2.29 per cent rate investors demanded at a sale of similar Spanish securities in late October. Spain also sold six-month debt at 5.23 per cent, up from 3.30 per cent in October.Italy's 10-year bond yield edged up once again, to nearly 6.8 per cent.Meanwhile bank regulators yesterday declared they were determined to push ahead with tough new bank rules known as Basel III.Given the volatility in the market, Australian bankers, including ANZ boss Mike Smith, have called for slower introduction of the rules that are scheduled to begin from 2013.Australian Prudential Regulation Authority chairman John Laker said the desire among G20 nations to stick to the agreed timetable for global banking reforms had not fractured, despite deteriorating conditions in Europe and US."If anything, the dynamics are moving the other way," Dr Laker said. "This is not a time to present weak banks to the marketplace, which is why we continue to repeat the importance we attach to Australian banks being on the front foot."InsideEurope's debt crisisgoes viralMalcolm Maiden, Page 6Stocks fall 2 per centReport, page 10