Letters of the Week

Libor and rates, property price monitoring, and relieving the debt burden.

Libor liberation

I’ve been following the news in the UK on the manipulation of the Libor rate. I’m curious to understand – when Australian banks say that their interest rates are higher due to borrowing costs, is this being influenced (at least in part) by the manipulated Libor rate in London? Is there any possibility that if the Libor is adjusted back to what it should be then interest rates could (in theory if the Australian banks are willing) drop here?

J Reid

Editor’s response: The full implications of the Libor pricing manipulation are not yet fully clear, though it is certainly something to follow. Alan Kohler published a very helpful article on the Libor manipulation, and interest rate manipulation in general, in Business Spectator this morning, which is worth a read. It is important to note, however, that Australian banks now source less than half their funding offshore, of which only a portion will be Libor-based, and talk of 'higher’ borrowing costs is often a factor of margins. Evidence to date suggests the Libor was being manipulated in both directions – so depending on the circumstance it may have even made borrowing cheaper at times.

Proper property measures?

There are large areas of Sydney where anecdotal evidence suggests property prices have fallen by 15% to 25%. However, this is not showing up in the market statistics reported. Is this because they are using median prices, not average prices? If so, then does the published performance of the entire market depend on a handful of properties in the middle? Shouldn’t we be more concerned with average prices as an indicator of our economic wellbeing?

R Cosier

Editor’s response: An article by Monique Sasson Wakelin from earlier this year considers various economic and property indicators, and what they might tell us about each other. However, Monique concludes that no one indicator – either median or average house prices – should be afforded undue weight.

Debt burden

I’m 62, working part-time, and like many readers I have a high cash allocation. There’s a lot written about what might happen in the near term but my frustration is that few commentators, if any, write about how governments will get rid of the ever-increasing debt mountain. Governments are struggling to get their deficits within the mandated 3% of GDP. So how do they repay 150% of GDP? My concern is that they’ll inflate their way out of the problem.

B Robinson

Editor’s response: You may be interested to read Percy Allan’s May 23 article on exactly these issues, A new age of uncertainty. Allan discusses the global government debt burden, and looks at how investors can prepare for either strongly inflationary or deflationary outcomes.

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