Mish's Global Economic Trend Analysis

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Australian Banksia Securities Assets Frozen As Mortgage Lending Scheme Blows Sky High; Six Canadian Banks on Moody's Review for Downgrade Posted: 27 Oct 2012 12:59 PM PDT Every day I get emails and links from all over the world. I wish I had time to comment on all of them. Here are a pair of stories regarding Canada and Australia. The Financial Post reports Six Canadian banks on review for Moody's downgrade Debt rating heavyweight Moody's Investors Service served notice on six of Canada's biggest banks that it may cut their rating by as much as two notches because of concern over high consumer debt levels and soaring housing prices. The downgrade warning covers Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, Canadian Imperial Bank of Commerce, Caisse Centrale Desjardins and National Bank of Canada. Moody's said it will also consider the removal of government support from the ratings of some of the subordinate debt issued by the institutions, a move that would have significant negative implications on the country's major lenders which have traditionally enjoyed an implicit promise of a bailout by the state if ever they got into serious trouble. "Today's review of the Canadian banks reflects our concerns about high consumer debt levels and elevated housing prices which leave Canadian banks more vulnerable to increased risks to the Canadian economy, and for some banks a sizeable exposure to volatile capital markets businesses is of concern," Moody's analyst David Beattie said in a statement. The move comes about four months after Moody's downgrade Royal Bank of Canada, the country's biggest bank by assets, by two notches because of its exposure to increasingly volatile global capital markets. At the same time the rating agency also cut the ratings of 14 other large banks mostly based in Europe and the U.S. Moody's noted that consumer indebtedness has been rising steeply for the last several years, with the ratio of household debt to income recently hitting a record 163%, up from 137% in 2007, a reflection of what it called growth in debt outpacing growth in income. Meanwhile, the rating agency is calling for economic growth of just 2% to 3% for this year and next year respectively, at the same time that external risks arising from the crisis in Europe and the struggling U.S. economy continue to rise. Moody's Late To The Party As is typically the case, Moody's is way late to the party. It is also overoptimistic about Canadian growth prospects. The big three rating agencies and the IMF all fail to understand the global forces at play. Australian Banksia Securities Assets Frozen In Australia, the collapse of "non-bank" Banksia Securities has affected thousands of investors fools who put $660 million in a guaranteed to blowup mortgage-lending scheme that chased high yields. How did Banksia Securities offer above market returns? The answer is risky mortgages and commercial property loans now going bust. Please consider Rural savings threatened after collapse Thousands of farmers and other regional Victorians face a nervous wait after the collapse last night of the financing group Banksia Securities, which has put at risk $660 million in savings. As a non-bank lender, Banksia offers investors high interest on debentures and then lends these funds out as mortgages or commercial property loans. Given Banksia does not hold a banking licence, the funds in the debentures are not backed by a deposit guarantee. Debenture firms often target retirees as investors, generating new business through promises of high-interest returns backed by property. McGrathNicol last night froze the $660 million in investments and stopped all interest payments as it began an urgent review of the company's accounts. The attempt to claw back funds could cause a credit crunch among some property developers that relied on Banksia for loans. Opposition Finance spokesman Robin Scott said Labor was worried about the damage Banksia's collapse may do on regional communities, particularly on jobs and development. Mr Scott said while it was too early to know the full impact he hoped the state government would look at ways of to help those most affected. Questions of the Day This is yet another disastrous borrow-short, lend-long scheme blown sky high. The New Australian blog asked Is this Australia's Northern Rock moment? I have a question of my own: Why should the government help anyone affected by this? Those stupid enough to have money in Banksia given the precarious state of Australian real estate deserve to lose it. The same holds true for developers. Any developer stupid enough to depend on Banksia for credit should now pay the price. Credit Crunch On the Way If developers are cut off, the result would be a genuine credit crunch as opposed to a lack of demand for money. For a comparison to the proclaimed credit crunch in Europe, please see Credit Crunch in Europe; Eurozone Lending Sinking Fast; Money Supply Contracts Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

New Definition of "Sustainable" is Six Months; New Word Needed to Replace "Haircut" Posted: 27 Oct 2012 10:32 AM PDT Germany's Finance Minister Wolfgang Schaeuble has changed the meaning of the word sustainable to "six months". While "sustainable" never had a definitive time-frame, when it comes to economic recoveries I am quite certain the term has never before been used to mean anything as short as "six months". For a look at revised definitions, please consider German finance minister rules out Greek debt "haircut" German Finance Minister Wolfgang Schaeuble ruled out public investors accepting a debt restructuring, or "haircut", on their Greek bonds but said in an interview to be aired on Sunday that a debt repurchasing program could be considered. "(A haircut) is a discussion that has little to do with the reality in the member states of the euro zone," Schaeuble said in an interview with Deutschlandfunk radio. Schaeuble said sovereign states could legally not write off billions of euros of losses on their official holdings of Greek government bonds. Schaeuble reiterated no agreement had been made on how to help Greece implement austerity cuts after Stournaras said international lenders had given Athens more time and a package of austerity measures would be put to parliament next week. Any agreement with near-bankrupt Greece would have to be sustainable - last longer than six months - and be trusted by financial markets. A debt repurchasing program, in which Greece would get new loans in order to pay back old debt, could be an option, Schaeuble said. "That is a consideration that one can make seriously. It has been put up for discussion by some members of the central bank board." Definition of Haircut While investigating definitions, let's also take a look at the meaning of "haircut" since there supposedly will not be one. In the financial world, the word "haircut" typically means a reduction in the value of bonds held as collateral. As we have seen, haircuts can be voluntary or involuntary. However, and as we have also seen, the definition of "voluntary" has been stretched beyond reasonable imagination. Whether voluntary or not, giving Greece more time to pay back loans would be a form of a haircut. Giving Greece money to pay back existing loans then reissuing the debt on more favorable terms to Greece would certainly be a haircut from any reasonable point of view. Both options are under serious discussion, but let's not dare call them "haircuts". Let's instead call the process a "manicure". Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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