Our banks are feeling the pain of the debt problems of Italy and Greece and so will you.
NEVER mind the Greeks, beware banks bearing gifts.
Rates have dropped and dividends raised but I wouldn't be getting excited by either if I were you.
What you gain on your mortgage you'll lose on your super because of the lower profits from the compromised economic outlook that forced a Reserve Bank cut.
And, for that matter, the banks' bigger dividends haven't come from a boom in lending but a book entry that has cut the provisioning for doubtful debts.
Even adding the 30 per cent tax break from franking credits, dividends aren't much chop when the shares are sliding.
The same goes for super since your fund is bound to be chockablock with high-dividend yielding bank stocks, which might have seemed a safe way of fast-tracking returns except the risk seems to grow daily that their prices will drop more than their payout. You'll be getting less on your savings too, so by my reckoning more will be worse than better off.
It's all Europe's fault, of course. The whole continent has become a welfare state, the most egregious example being Greece, which owes 152 per cent of its GDP, putting the whole country in hock and then some.
Italy owes 120 per cent but because it's economy is much bigger - no wonder the market is freaking out - it accounts for one-quarter of Europe's sovereign debt, mostly to French banks.
Alas, the economic uncertainty and mad market mood swings are destined to drag on for years because the European banks are going to have to pass the hat around to restore capital eaten up by their increasingly worthless Greek and Italian bond holdings.
As they raise more capital they'll suck funds out of the global financial markets and push up funding costs.
But they'll also need to curtail their lending, which will keep Europe in the doldrums for years and be a drag on global economic growth.
It's a wonder banks are still subscribing to Italy's ever increasing bond issues, especially when there's another ?300 billion of them maturing next year, which will have to be rolled over and are bound to go at an even cheaper price.
Yet neither can afford the other to go under. That's why there will be a solution, either foisted on Europe by the market or, less likely, by the politicians. As Luxembourg's prime minister Jean-Claude Juncker once confided "we all know what to do but we don't know how to get re-elected once we have done it," though maybe he was being generous on the first count.
The special bail-out fund is supposed to have ?1trillion to play with. But not to put too fine a point on it, it doesn't.
Likewise, they refuse to admit Greece is broke even though it will never be able to repay its debts, tantamount to dangling bait in front of a market baying for blood, most recently that of Italy's billionaire prime minister, Silvio Berlusconi. Imagine that, it wasn't his own money that was his undoing but everybody else's.
Anyway, at some point the European Central Bank (ECB) will be forced to overlook the fact that it is illegal for it to do anything but fight inflation, something that hasn't stopped it already buying Italian and Greek bonds and going for broke, as it were.
Sadly, all banks are in this together. Ours might not have lent to Europe but they borrow from it.
Depending on when and by how much the ECB takes action, their costs will rise, or revenues fall.
Neither will be good for their share prices or your super.
Frequently Asked Questions about this Article…
How does the European debt crisis (Greece and Italy) affect Australian banks and everyday investors?
The article explains that Europe’s sovereign debt problems are spilling over globally: European banks holding Greek and Italian bonds are losing capital, which forces them to raise funds and pushes up global funding costs. Australian banks may not have lent directly to Europe but they borrow from European markets, so higher funding costs and weaker bank revenues can hit bank share prices, dividends and the returns in investors’ super and savings.
Why have some bank dividends risen but investors still shouldn’t be overly excited?
According to the piece, bigger bank dividends haven’t come from a lending boom but from accounting moves that cut provisioning for doubtful debts. With bank share prices sliding, the benefit of higher payouts — even after factoring the roughly 30% tax break from franking credits mentioned in the article — may be outweighed by falling capital values.
How will a Reserve Bank interest rate cut help mortgages but hurt superannuation and savings?
The article notes that while mortgage holders may benefit from lower rates, the RBA cut was prompted by a weaker economic outlook that reduces bank profits. That lower profitability can reduce returns on super funds (which often hold lots of bank shares) and lower interest on savings, so many people could be worse off overall despite cheaper mortgages.
What does it mean when the article says European banks will need to ‘raise more capital’ and why does that matter to investors?
Raising capital means banks will seek new equity or other funding to replace losses from falling bond values. The article warns that this activity will pull funds out of global markets, raise funding costs, pressure bank earnings and force banks to curb lending — all of which can weigh on share prices and slow economic growth, affecting investors’ portfolios.
What role is the European Central Bank (ECB) playing in the crisis, and should investors be aware of its bond-buying?
The article says the ECB has already been buying Italian and Greek bonds and may be forced to stretch its mandate further to stabilize markets. That intervention matters because timing and scale of ECB action influence funding conditions, bank costs and market sentiment — factors that ripple through to investors worldwide.
Is Europe’s bailout fund a reliable safety net for the debt crisis?
The article highlights skepticism about the special bailout fund: while it’s supposed to have €1 trillion to use, the author argues it doesn’t effectively have that capacity and political limits make it an uncertain backstop, so markets remain wary.
Why are Greece and Italy singled out as particularly risky in the article?
The article points out that Greece owes about 152% of its GDP and Italy about 120%, with Italy representing roughly a quarter of Europe’s sovereign debt and having a large amount of bonds (about €300 billion) maturing next year. Those facts help explain why markets are especially nervous about those two countries’ debt.
Should I be worried if my superannuation fund is heavy in high-dividend bank stocks?
The article warns that many super funds are ‘chockablock’ with high-dividend bank stocks that once looked like a quick way to boost returns. Given the growing risk that bank share prices could fall more than their payouts, the piece suggests investors should be aware that heavy exposure to banks could reduce long-term super returns if prices drop.
Call 1300 880 160
Start a chat
Schedule a call
