Australia’s economic uncertainty, arising in Europe, to persist: RBA deputy governor Guy Debelle
RBA deputy governor Guy Debelle says an improving banking outlook in Europe might lead to lower funding costs for Australian banks but the current uncertainty will remain.
Speaking today at the Bloomberg Seminar in Sydney, Debelle says there has been “a thawing in bank debt markets” in 2012.
“With the beginning of the new year, the investment slate is clean and risk tolerance thus far is on the increase. This development has been bolstered by the avoidance of worst case outcomes … and by the European Central Bank’s action [in December to bolster liquidity],” he says.
However, he provided support to the decisions of the major banks to push up variable mortgage rates independently of the RBA by admitting that there had been a “sizeable step up” in the cost of debt issuance in 2011.
“Investors are demanding much higher compensation for bank credit risk now than they were in mid-2011. The repricing probably happened in the last quarter of 2011, but the general lack of issuance made it more difficult to observe.
“This global repricing of bank debt has clearly affected the Australian banks’ wholesale funding costs,” he says.
In his presentation, Debelle included a table that showed how bond market issuance costs had risen recently with covered bonds issued by the Australian banks “at markedly wider spreads than their unsecured issuance mid-year”.
The cost of issuing residential mortgage-backed securities, another form of offshore wholesale funding, also increased over the course of 2011.
However, Debelle says there are some signs of encouragement with a “sizeable narrowing of spreads in the secondary market on the domestically issued covered bonds, to around 140 points over swap” over the past few days.
“This narrowing in bank credit spreads was confirmed by the unsecured issuance last week.”
Despite this encouragement, Debelle acknowledges that some corporations are able to raise funding more cheaply than the major banks because of their higher credit rating.
“For example, Coke, which is rated A-, was able to issue more than 100 basis points below the AAA rated domestic covered bond issues,” he says.
In addition, he says the rise in wholesale funding costs has been “accentuated for funds raised offshore by a widening in the cost of swapping foreign exchange into Australian dollars”.
Overall he says the start of 2012 has been more positive than the end of the last year.
“Whether this happier state of affairs persists is difficult to tell. There have been outbreaks of optimism over the past couple of years which were dashed,” Debelle warns.
“I think the only thing which is certain, is that uncertainty is likely to persist for some time to come.”
