Category Archives: australia

Australian Bank Guarantee on Wholesale Debt

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In a post earlier this week, I wrote

The Government was right to step in with the guarantee and it has doubtless provided some stability for a financial system that remains jittery, but the sooner the details are sorted out, the better.

The main outstanding question I was referring to was how the guarantee would apply to wholesale debt. Uncertainty on this point has been creating significant concern for investors in cash management trust and other managed funds. The amount of money moved from these funds to bank deposits may be over $1 billion.

Finally today, the Government announced the wholesale guarantee fee, which will also apply to retail deposits over $1 million. While there had been speculation that the fee would vary based on the time to maturity of each security, the Government has instead opted for a fixed fee. The fee varies with the credit rating of the bank taking up the guarantee.

Credit Rating Debt Issues Up to 60 Months
AA 0.70%
A 1.00%
BBB and Unrated 1.50%

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Banks Covered by the Australian Government Guarantee

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Following the shenanigans in parliament earlier this week, the Government has modified their original 12 October media release about the Government guarantee for banks. In the process they no longer list the local and foreign banks covered by the guarantee, so with the help of Google’s cache* I am republishing the original list here. The Government has also (finally) announced the terms of the wholesale guarantee, so stay tuned for another post on that subject. Update: here is that post.

Today the Government announced the fees payable for a guarantee on wholesale debt, which will also apply to retail deposits over $1 million. At the same time they announced that foreign bank branches will be able to access the deposit guarantee but only if they pay the fee, regardless of the size of the balance. The lowest possible fee is 0.70% (it varies with each bank’s credit rating) and the bank is sure to pass that on!

Note that foreign banks not in the list below are now also able to access the wholesale guarantee (for short-term debt only) and the deposit guarantee, but the wholesale guarantee fee will apply even on balances below $1 million.

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Update on the Guarantee of Australian Banks

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Treasury Secretary, Ken Henry, appeared before a Senate Estimates Committee today to provide some clarity on the nature of the consultation between the Government, Treasury and the Reserve Bank prior to the 12 October announcement that the Government would provide guarantees for all Australian banks. This followed yesterday’s article in The Australian which claimed that the Reserve Bank and Treasury were at odds on the question of providing an unlimited guarantee. Opposition leader Malcolm Turnbull tried to capitalise on the issue in Parliament the same day and, despite scoring some initial points, he lost the upper hand when he appeared to question Henry’s integrity.

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Australian Banks Get A Government Guarantee

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In the latest instalment of the Global Financial Crisis (“GFC”), following the lead of Ireland and other countries, the Australian Government has taken the extraordinary step of guaranteeing all deposits with Australian banks, building societies and credit unions as well as locally incorporated subsidiaries of foreign banks. The guarantee can also extend to wholesale debt (if banks pay an as yet undetermined guarantee fee), which allows protection of bonds issued by Australian banks offshore.

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2042: Art on the Street

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It’s time for a break from watching the financial markets implode. Instead, this post will focus on the arts, Newtown-style. Every year, the shops of Newtown become an extended gallery exhibiting the works of young Australian artists. Or at least, that’s how I describe it. According to the City of Sydney website, the aim of the exercise is “to combat the exclusivity fostered by institutional gallery spaces”. In years gone by, the exhibition was called “Walking the Streets”, but this year it goes by the name “2042: Art on the Street”. For those who are not local, 2042 is the postcode of Newtown and the immediate surrounds.

Being locals, Henry, my five year-old son, and I took a walk up King Street today to look at some of the works on show. Inspired by the blog Nosey in Newtown, we decided we would document the event, so we set off both armed with cameras. The undoubted favourite was the sculpture of giant ants beginning to rip into a car.

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“Eat My Shorts” – Short Selling in Australia

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Earlier this week, Australia joined the US, the UK, France, Germany, Canada and other countries in clamping down on the practice of “short selling” shares. According to the regulator, the Australian Securities and Investments Commision (ASIC), the new restrictions were aimed at reducing “unwarranted price fluctuations”. For the moment, the restrictions are in place for a period of 30 days, at which point ASIC will decide whether to extend or lift the restrictions.

For many outside the financial markets, the practice of short selling is a mysterious one and, for some, rather worse than that. The following letter to the editor in the Sydney Morning Herald is a case in point:

Short selling can be carried out only if the buyer is misled into believing that the seller owns the stock (“ASIC in total ban on short selling“, September 22). Can short selling ever be morally justified? Surely the only beneficiaries of such activity are those with sufficient funds to manipulate the sharemarket. After all, we cannot legally “short sell” anything else we do not own, such as a neighbour’s house, business or car.

Laurie Mangan Tamworth (September 23)

So what is short selling? Contrary to Laurie’s view, there is no misleading involved but it does involve selling shares that, essentially, you do not own. There are two types of short selling: naked (which really sounds naughty) and covered (which sounds a bit better). To explain what each of these involves, I’ll first go into some of the mechanics of share trading.

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Income Inequality in Australia and the US

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A topic that the New York Times visits from time to time is that of income inequality. In the United States, the gap between the highest and lowest earners has been increasing over the last 80 years or so. A recent article returns to this theme and provides further insight into the trend. It cites research from the new book “Unequal Democracy” by Larry M. Bartels, which indicates that income inequality has increased far more under Republican presidents than under Democrats.

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Weak Dollar and Australian Petrol Prices

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The world’s financial markets have shifted their focus from oil supply problems to the demand side of the equation. They appear to have decided that the US and European economies look so dire that oil consumption will collapse. As a result, oil prices have been in free-fall, barely staying above US$100 per barrel. If the recent hostilities in Georgia had taken place a couple of months earlier, oil prices would almost certainly have shot up. But with the shift in focus, they scarcely reacted to the conflict.

Unfortunately for Australian motorists, a weak Australian dollar is preventing the full effect of lower oil prices coming though to the price of petrol at the pump. Oil is not the only commodity to see price declines, not good news for the currency of a commodity producing country. More significantly, the Reserve Bank has started cutting interest rates and the dollar is moving down alongside rates. Since the end of July, the dollar has fallen almost as much as oil. The result, evident in the graphs below, is that oil prices have not fallen nearly as much in Australian dollar terms as they have in US dollar terms.

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Australian Grocery Prices on the Rise?

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Last month, the Australian Government launched the GroceryChoice initiative, with the goal of helping consumers find the cheapest place to shop for their groceries. As I wrote at the time, the GroceryChoice website allows users to compare prices in a given area, but comparisons across areas are not made easy. Undeterred, I simply scraped all the data from the web-site for easier analysis. Today GroceryChoice released prices for the month of September, making it possible to start analysing prices over time as well as by region and retailer.

The website provides prices for a number of specific grocery “baskets” (Fruit & Vegetables, Meat & Seafood, etc.) as well as for a more general “Basic Staples” basket. A crude average of prices of this Basic Staples basket around the country would suggest that prices are on the rise, having increased from $75.41 for August to $75.97 for September. However, this figure should be taken with caution. Quite apart from the fact that this analysis does not take into account the differing population sizes in each region, there is also significant variation across the different retailers, as is evident in the chart below.


“Basic Staples” Prices by Retailer (A$)

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Digging into GroceryCHOICE

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Earlier this week, South Australian senator Nick Xenophon raised concerns that the Government’s FuelWatch scheme would lead to higher petrol prices and that small independent petrol retailers were likely to be disadvantaged by the scheme. So it looks likely that the FuelWatch legislation will fail to pass the senate and then fade into oblivion. I can’t say I’m too upset about this as I have been critical of the scheme. Furthermore, falling oil prices have led to a fall of around 20 cents/litre in petrol prices which takes much of the sting out of the issue.

So now I am free to turn my attention to another Australian Government initiative, GroceryCHOICE**. This scheme aims to “[help] consumers find the cheapest supermarket chain in their area without having to compare hundreds of prices”. Every month a survey is conducted of prices on around 500 different grocery items at over 600 supermarkets around the region. These prices are aggregated into “baskets” of goods in the following categories:
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