Sigh…somebody shoot me. Bloomberg today has provided such a spectacular piece of selective reporting that I feel I’ve had a lobotomy:
Bond markets are judging Australia’s banks to be the safest in at least a year relative to European and U.S. firms after the South Pacific nation’s lenders cut their dependence on overseas funding that helped bring about the first credit-rating downgrades in seven years.
The average price of credit-default swaps tied to bonds of Australia’s four biggest banks traded at 83 basis points less than that of Europe’s 13 biggest lenders this month, the largest discount since at least 2005, CMA prices show. The gap to U.S. firms was 55 yesterday after reaching 63 on Aug. 8, the most since May 2010.
Commonwealth Bank of Australia (CBA) and Westpac Banking Corp., the nation’s two largest lenders, said this month they can avoid bond sales for as long as six months if debt markets freeze again as they did after the collapse of Lehman Brothers Holdings Inc. in 2008. Instead of borrowing offshore, banks are obtaining funds from Australian households that are saving at about the highest rate in a quarter century.
“It’s a sweet spot for the Aussie banks at the moment,” John Manning, a Sydney-based credit analyst at Royal Bank of Scotland Group Plc, told Bloomberg in an interview yesterday. Bond markets have “recognized the preemptive work that the banks have done in reducing their reliance on wholesale funding,” whereas European banks, French ones in particular, “have done very little,” he said.
The average for five-year credit-default swaps on Commonwealth, Westpac, National Australia Bank Ltd. (NAB) and Australia & New Zealand Banking Group Ltd. climbed 61 basis points this quarter to 189.3 yesterday, CMA data show.
A similar gauge for six of the biggest U.S. banks soared 117 to 244.2 and the average for 13 European lenders jumped 111 to 257, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.
Here is a short term chart of Australia big four CDS prices fro two days ago:
In other words, Bloomberg is actually reporting that CDS prices have broken out on the upside. And the implications of that are apparent in the below long term chart:
That Australia’s banks stand at the edge of a cliff that is only 700 meters high versus 900 meters for some other banks is hardly a comfort.
As I said Monday:
CDS prices are not a perfect proxy for the bank’s underlying funding costs but they are the most liquid market pertaining to the bank’s wholesale funding and they are telling us that the stress is significant.
…Indeed, sources have revealed that during the most intense phase of the equity market selloff two weeks ago, on one particular day, the money markets that supply Australian banks with short term debt seized up, causing a mini credit crunch. Investors went to cash and cash only. It only lasted a day because of the equity bounce but it was an uncomfortable reminder of 2008.
CDS prices and funding sources will need to remain stressed for an extended period for a bailout to be needed, but that’s no reason to misreport.
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
