There are couple of stories around this morning that suggest the ANZ PR department went into overdrive after last Friday’s statements by Mike Smith that wholesale markets are closed again to the banks. David Uren of The Australian and Banking Day both defend the comments as referring only to European funding markets. The US and Asia remain open.
Well, bully for them I say, but that’s not really the point. Last time I looked we had global debt markets so when one major market is shut that will obviously affect pricing in all others.
The confusion arises from the terminology. Markets are never actually closed, they simply become too expensive to issue debt at anything other than a loss.
A quick glance at bank CDS prices, which are global, tells the tale. Prices shot up another 10 points or so Friday, above 190bps. CDA are based upon 5 year bonds, which are the long term bonds that Australian banks need to borrow at to satisfy regulators:
Approaching 200bps is not actually shut but it sure as hell is uneconomic to issue underlying bonds. The banks can issue at these levels of course for a while, as they did earlier this year, but make no mistake, they’ll need to reprice their book afterwards, which will mean an increased spread to the cash rate.
Someone has to pay.
