Bloomberg News

No Immunity for Banks as Greece’s Vote Looms: Australia Credit

June 29, 2011

June 29 (Bloomberg) -- Australian banks are finding they’re not immune to the debt crisis engulfing Europe as a gauge of funding costs reached the highest in almost a year and bond risk surged to the most since July.

Greek lawmakers are debating austerity measures required to unlock the next installment of the nation’s bailout. Westpac Banking Corp., National Australia Bank Ltd., Australia & New Zealand Banking Group Ltd. and Commonwealth Bank of Australia -- downgraded by Moody’s Investors Service last month due to their reliance on debt funding markets -- don’t own Greek debt and get at least 70 percent of their revenue at home, where growth is forecast to outpace the U.S. and Europe next year.

“Risk aversion is dominating markets at the moment,” said David Plank, Sydney-based head of research at Deutsche Bank AG. “Does it make sense? Not really, given Aussie banks’ lack of exposure to Greece, but lots of things don’t make sense from a fundamental perspective when markets are dislocated.”

The gap between Australia’s bank bill swap rate and the overnight indexed swap rate, a gauge of banks’ reluctance to lend, surged to 34 basis points on June 27, the highest since July 7 and up from as little as eight basis points in April. The Libor-OIS spread, a similar measure for global U.S. dollar funding, has fallen two basis points this month to 13.

Bond Risk

The average cost of credit-default swaps on the senior debt of Australia’s four biggest banks jumped 1.8 basis points to 131.5 basis points yesterday, the highest level since July 7 last year, according to prices from CMA.

Australia’s bank bill rate, a measure of what banks charge to lend to each other and the local equivalent of the London interbank offered rate, has hovered within three basis points of 5 percent for all of June for three-month debt. Interest-rate swaps, which track expectations for the Reserve Bank of Australia’s benchmark rate, have dropped nine basis points this month to 4.72 percent on concerns Greece will struggle to avoid default.

Yields on all Australian government securities maturing in six years or less touched levels below the Reserve Bank’s overnight target rate of 4.75 percent yesterday in Sydney. The last time that occurred was during the credit freeze that followed Lehman Brothers Holdings Inc.’s collapse in 2008.

Greece’s Creditors

Greece’s creditors are considering a rollover agreement involving 70 percent of their bonds to prevent a default and meet politicians’ calls that they contribute to the country’s second rescue in as many years. The nation’s lawmakers are scheduled to vote on the austerity measures today.

Euro region finance ministers meet on July 3 in Brussels to work on a plan to be approved at a follow-up meeting on July 11. A deal on the rollovers is needed to get the new aid package passed, a condition for freeing up a 12 billion-euro ($17.2 billion) payment from the original bailout that Greece needs to meet 6.6 billion of bond maturities in August.

Australian banks have no holdings of Greek debt, according to data from the Bank for International Settlements as of the end of 2010. French banks lead the group of Greek creditors with overall claims amounting to $56.7 billion, including sovereign debt holdings and lending to companies and households.

Officials at Australia’s four largest lenders yesterday confirmed they don’t hold Greek bonds.

Bank Profits

The banks, which remained largely profitable throughout the credit crisis without government bailouts, have been mostly unaffected by the Europe credit crunch so far, Reserve Bank of Australia Assistant Governor Guy Debelle said in a speech in Sydney yesterday.

“At the moment there is very little sign of any stress,” he said. Australia’s banks have all issued “quite a bit in recent weeks notwithstanding the state of global markets.”

Commonwealth Bank announced bond offerings in six currencies this month, according to data compiled by Bloomberg.

National Australia Bank sold 750 million euros of 3.75 percent 2017 notes on June 1, the data show. The bonds, sold at 99.828 cents on the euro, traded at 99.722 cents as of 3:16 p.m. in Sydney, according to ANZ Bank prices.

Nomura Holdings Inc. cut its bond sale forecast for Australia’s four biggest banks to A$89 billion ($93.9 billion) for the 2011 financial year, from an earlier estimate for the period of as much as A$130 billion, according to a report published last month.

Bonds Gain

Financial bonds in Australian dollars have gained 1 percent this month, compared with a loss of 0.5 percent on global bank debt, Bank of America Merrill Lynch indexes show.

The nation’s central bank may also be better equipped than global peers to respond if Europe’s debt crisis worsens, after boosting its cash rate to the highest in the developed world. The RBA last week said it weighed the European situation against a forecast pick-up in local growth and inflation in deciding to keep borrowing costs on hold this month.

RBA Governor Glenn Stevens raised the cash rate seven times between October 2009 and November 2010, bringing it to 4.75 percent. He slashed borrowing costs to a record low 3 percent in 2009 amid the credit freeze, from 7.25 percent in August 2008.

The euro region is likely to expand 2 percent in 2011 and 1.7 percent in 2012, according to the median estimates of economists surveyed by Bloomberg. In the U.S., where the jobless rate climbed to 9.1 percent in May, growth is estimated to be 2.5 percent this year and 2.95 percent in 2012. Australia’s economy may expand 2.8 percent in 2011 and 4 percent next year, the surveys show.

Mining Boom

Demand for commodities has helped the nation’s currency gain 20 percent against the U.S. dollar in the past 12 months. It reached $1.1012 on May 2, the highest since exchange controls were scrapped in 1983, and traded at $1.0560 at 3:33 p.m. in Sydney.

Consumer prices in Australia may rise an annual 2.7 percent in the next five years, based on the gap between yields on government bonds and inflation-indexed notes.

Yields on Australia’s benchmark 10-year bonds climbed 10 basis points today to 5.16 percent, after falling to within 0.25 percentage point of the central bank’s benchmark on June 27, the smallest gap since Feb. 2, 2009.

Moody’s lowered its rating on Commonwealth Bank, Westpac, ANZ Bank and National Australia Bank to Aa2, its third-highest grade, citing their reliance on debt markets that will be “less liquid and a lot more volatile” over the next five to seven years, Patrick Winsbury, a senior vice president at the firm in Sydney, said in a May 19 interview.

“Even though Australian banks are some of the healthiest globally, if the Greece situation worsens we would expect to see the price they pay for debt to increase,” said Mark Bayley, a Sydney-based credit strategist with advisory company Aquasia Ltd. “In any time of financial stress there’s a tendency for investors to throw the baby out with the bathwater.”

--Editors: Garfield Reynolds, Nicholas Reynolds

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To contact the reporters on this story: Sarah McDonald in Sydney at smcdonald23@bloomberg.net; Jacob Greber in Sydney at jgreber@bloomberg.net

To contact the editors responsible for this story: Shelley Smith at ssmith118@bloomberg.net; Chitra Somayaji at csomayaji@bloomberg.net


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