THE retiring chief executive of Commonwealth Bank, Ralph Norris, has warned that the European debt crisis has entered a dangerous phase, likening the turmoil to the shock to the global financial system from the collapse of Lehman Brothers three years ago.
The nation's most senior banker said global money markets "effectively froze" this week as Germany failed to roll over the entire stock of ?6 billion ($8.2 billion) in long-term bonds. His comments came as the leaders of the euro zone's key economies France and Germany met in Austria overnight to resolve differences over how to handle Europe's debt crisis.
Mr Norris, who retires next Wednesday after more than six years in the role, warned that credit crunch conditions were returning, and were threatening to choke off funding for banks around the world.
"I would have to say that this has potential to be significantly worse than the Lehmans [fall] and the subprime crisis because this is now we are talking about nation states," Mr Norris told BusinessDay yesterday.
"If you have a situation like you had today where markets had effectively frozen then it doesn't matter how good your name is, you are not going to be able to access markets," he said.
"As of today no banks could access these markets."
The Westpac chief, Gail Kelly, also expressed fears about the fragile situation and urged Europe's regulators to get on top of the crisis.
"Clearly what's happening in Europe is a major concern and not improving," she told BusinessDay. "The various authorities in Europe actually have the capacity to deal to these issues - I certainly wish they'd get on with it and do it."
The sharemarket ended slightly lower yesterday, but performed better than its US and European counterparts. The benchmark S&P/ASX 200 index fell for the fifth day in a row, giving up 6.8 points to 4044.2. The Australian dollar traded near a seven-week low and was at US97.09? last night.
The stresses on global money markets mean the costs of raising wholesale funds for banks were significantly elevated, Mr Norris said.
One of the biggest wake-up calls for European policymakers occurred early Thursday morning as Germany, the region's powerhouse, suffered probably its worst bond auction ever.
Debt markets were shocked by the news that more than a third of the so-called Bunds went unsold in an auction of ?6 billion of 10-year debt. The poor sales result stoked fears that Germany was being dragged into the crisis.
One German politician warned that the country was being "drawn into the debt swamp".
The head of fixed income at Aberdeen Asset Management, Vince Rodriguez, said, "It's the first sign that the contagion, the fears that we have, are spreading not only to France, but to Germany."
The French President, Nicolas Sarkozy, was scheduled to meet the German Chancellor, Angela Merkel, for further talks on the euro zone crisis.
Although Germany's bonds remain expensive, the poor outcome of the auction was a clear message that investors were rejecting exposure to the euro. This is only likely to intensify near-term expectations of a possible break-up of the region, something the euro zone members are firmly against.
"The risk is rising further that these stresses spread outside of European countries, including Australia," the ANZ's chief economist, Warren Hogan, said.
"Indeed, the two key transmission mechanisms to Australia from this European crisis - China and funding pressures - are now worsening."
The German jitters follow Europe's second biggest economy, France, coming under pressure. Questions are being raised over its triple-A credit rating, pushing up its borrowing costs, which have also risen for others, including Spain.
The Australian government's borrowing costs have fallen to record lows as investors seek a haven from the European turmoil. The benchmark 10-year yield yesterday dropped to a record low of 3.81 per cent.
with Lucy Battersby
Inside
Debt markets are in danger of locking up
Malcolm Maiden, Page 6
Stocks report
Page 10
Frequently Asked Questions about this Article…
What did Commonwealth Bank CEO Ralph Norris warn about the European debt crisis?
Ralph Norris warned that the European debt crisis had entered a dangerous phase, likening the turmoil to the shock from Lehman Brothers. He said global money markets "effectively froze" during the recent stresses, raising the risk that funding for banks around the world could be choked off.
How could the European debt crisis affect Australian banks' funding and wholesale borrowing costs?
The article says stresses in global money markets have raised the costs of raising wholesale funds for banks and, at times, made markets inaccessible. Norris warned that when markets freeze, even well-known banks can struggle to access funding, and ANZ's chief economist highlighted that funding pressures are a key transmission channel to Australia.
What happened in the German bond auction and why should everyday investors care?
Germany failed to sell more than a third of €6 billion of 10‑year Bunds at a key auction, described as one of its worst results. That alarmed markets because it showed contagion spreading beyond weaker euro economies to Germany, increasing investor concerns about euro exposure and the stability of European debt markets.
How did Australian markets respond to the European turmoil (S&P/ASX 200 and the sharemarket)?
The Australian sharemarket ended slightly lower, with the S&P/ASX 200 falling for a fifth straight day (down 6.8 points to 4044.2), but it still performed better than US and European counterparts on that day. The article highlights market weakness and increased volatility tied to the European situation.
What happened to the Australian dollar and government bond yields amid the crisis?
The Australian dollar traded near a seven‑week low (about US$0.9709 in the report), as investors sought safe havens. At the same time, Australian government borrowing costs fell to record lows, with the benchmark 10‑year yield dropping to 3.81%, reflecting demand for perceived safer sovereign debt.
Are experts warning the euro crisis could spread beyond Europe, and what transmission channels matter?
Yes. Aberdeen Asset Management and other market commentators flagged spreading contagion to Germany, and ANZ's chief economist, Warren Hogan, warned the risk of stresses spreading outside Europe — including to Australia. He pointed to two main transmission channels for Australia: a slowdown in China and worsening funding pressures.
What policy moves and meetings should investors watch as the euro zone responds to the debt crisis?
The article notes French President Nicolas Sarkozy was due to meet German Chancellor Angela Merkel for further talks, and that bank leaders urged European regulators to act decisively. Everyday investors should monitor euro‑zone leader negotiations, regulator announcements and any coordinated rescue or support measures that could affect markets.
Given the rising market stress, what practical things should everyday investors monitor right now?
Based on the article, investors should keep an eye on funding conditions for banks, wholesale borrowing costs, sovereign bond auctions (especially in Europe), movements in the Australian dollar, the S&P/ASX 200 and broader sharemarket volatility, and updates from European leaders and regulators — all of which can influence market sentiment and risk levels.
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