THE DISTILLERY: Rates rationale

Jotters pore over the RBA minutes, while one eyes a drachma alternative for Greece.

The freshly sealed Greek bailout coincided nicely with the Reserve Bank's minutes that indicated its growing sense of calmness for the near-term outlook in global markets. Between this and an unemployment rate that won’t yield to the headline grabbing job losses in dying industries, Australian interest rates are staying put for now. What the RBA is looking for is out-of-cycle increases from the major banks, which as the Sydney Morning Herald’s Michael Pascoe explains it could very well get, or a Greek default, which the same newspaper’s Malcolm Maiden says remains quite possible, but the Euro agreement has delayed it. And under all of this, there’s still a lingering sense of wariness for domestic Australian companies, which The Australian’s John Durie points out has revealed itself this earnings season with investors approaching results cautiously and then jumping on a relief rally when disaster doesn’t come.

But first in this morning’s edition of Distillery, the Sydney Morning Herald’s Michael Pascoe says the Reserve Bank remains poised to cut interest rates if Europe deteriorates, but the only real prospect for a cut is one to offset any out-of-cycle increases from the banks.

"Such an adjustment certainly isn't ruled in either, but in the minutes of a meeting that took place several days before the ANZ led the banks' interest rate rise the RBA devoted a longish paragraph to confirming the banks' story of higher funding costs: " … these developments had increased banks' overall cost of funding relative to the cash rate and had narrowed the difference between banks' lending rates and funding costs. That's a slap at the bank jabbering on both sides of federal politics. If Joe Hockey just received his wish that the RBA would play the role of non-binding referee on bank rate movements, the ref ruled ahead of the score that it was a fair try.”

Pascoe's colleague Malcolm Maiden offers a scintillating analysis on the situation in Greece and broader Europe.

"For many people in Greece, however, the new spending cuts tighten the noose around the neck of an economy that is already half-dead after contracting by 7 per cent last year. The alternative – a default that sees Greece exit the European Union and the euro, re-float the drachma as its currency and then roughly double its international price-competitiveness in industries including tourism as the value of the revived currency is set at about half that of the euro – may yet surface in the election campaign. Greece's economy is in fact so weak now that the bailout and debt reconstruction barely keep it on a path to sustainable funding, cutting its debt load from about 160 per cent of gross domestic product now to 120.5 per cent in 2020. Everything needs to go according to plan: in other words, to get Greece's debt down in eight years' time to the level that sparked the savage sell-down last year that pushed Italian bond yields close to the tipping point where Italy would need to borrow more just to service its existing debt.”

The Australian’s John Durie listened in on OneSteel’s results yesterday and heard chief executive Geoff Plummer deliver a pretty reasonable explanation as to why his company wouldn’t close the red-stained Whyalla steel mill – at least, not yet anyway.

"He confided yesterday his steel manufacturing division would return to positive cashflow this year. It would make little sense spending north of $100 million to close a mill that was cashflow positive, at least not yet. Steel is the unprofitable dog in his portfolio and while his stock price jumped over 12 per cent to 86 cents yesterday, that compared to its close a year ago at $3.06 a share. The price jump along with the 8.3 per cent jump in Boart Longyear's stock price conforms to the trend this reporting season: the market is nervous heading into results day, but when it proves to be benign, that sparks a relief rally.

And fourthly, The Age’s Michael West shines a light on a court case against Standard & Poor’s in our very own backyard over poor ratings, something that’s all but impossible to prove in the company’s homeland where it shamelessly hides behind the first amendment.

"The twelve councils bought a bunch of ‘Rembrandt’ toxic structured-finance products in 2007. They tanked 90 per cent in six months and now the councils are suing investment bank ABN Amro for making the Rembrandts, Local Government Financial Services for selling them and S&P for appending their once-hallowed AAA credit rating. For S&P, this is the first legal assault in the world to proceed to trial. A retinue of claims has been filed against all the credit rating agencies in the US, yet they are mostly bogged down in procedural issues. So the world is watching closely how they play this one.”

Getting back to that lingering sense that the Australian economy doesn’t feel like it’s doing as well as the headline data suggests, The Age’s Adele Ferguson says the latest Dun & Bradstreet survey paints a grim picture for small business. The same newspaper’s Tim Colebatch hits on this nervousness by reaching for that old adage that a statistician (economist in this instance) will tell a person with one foot in boiling water and another in ice that their average temperature is normal.

The Sydney Morning Herald’s Ian Verrender points out that the European Central Bank has purchased significant amounts of Greek bonds – transferring what would have been private debt into the public coffers – which would help minimise the contagion in the event of a Greek default. But with Italy buckling, they can’t afford to let Greece go. The Australian Financial Review’s Chanticleer columnist Tony Boyd lists four reasons why Australian investors shouldn’t get excited about the Greek deal.

In perhaps more reassuring economic news, Fairfax’s Peter Cai quotes HSBC chief economist for China, Qu Hong bin, who counters the argument that China needs to transition from a government-investment and export driven economy, to one of domestic consumption. The counter-point goes that China is still early enough in the urbanisation cycle. And The Sydney Morning Herald’s Ross Gittins lends a helping hand by discussing the philosophy of happiness.

In company news, the Sydney Morning Herald’s Elizabeth Knight also looks at the metamorphosis currently underway at OneSteel. The Australian’s Barry Fitzgerald lets us in on a story about Sydney’s Global Geoscience, one of an almost endless sea of hopeful mineral explorers, which has struck a brilliant deal with Canada’s Osisko Mining Corporation. Fairfax’s Insider columnist Ian McIlwraith finds Queensland’s Campbell Brothers well positioned to take advantage of growing exploration budgets. The Australian’s Tim Boreham reflects on how the mining support companies – the engineers, the drillers and equipment providers – took the limelight yesterday with a string of well received results. And the same newspaper’s Richard Gluyas says the response from the supermarkets to competition watchdog boss Rod Sims’ pledge to look long and hard for test cases demonstrating a misuse of power on their part was, effectively, ‘bring it on’.

Meanwhile, The Australian’s Bryan Frith suggests that the Takeovers Panel is possibly looking the other way when it comes to its recent decision on residential property group RCL.

The Sydney Morning Herald’s Jessica Irvine asks quite pointedly whether the government can afford not to increase spending on education by $5 billion a year – the key recommendation of the Gonski review.

And finally, the Herald Sun’s Terry McCrann throws in his two cents on the Reserve Bank's latest minutes.

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