Oz taxpayers at risk in NZ property bust?

Looks like I mistook tone for substance in my recent assessment that S&P was getting more bullish on Australia. Following the recent release of the sovereign report, I contacted former Australian sovereign analyst Kyran Curry and he confirmed that S&P’s stern outlook for Australia had not changed.

That is obvious today with the release of two new reports into the banks. The first is a gloomy assessment of prospects for any ratings upgrades, as well as more likely downgrades. The second report is a warning about the increasing risk of a New Zealand property crash and, wait for it, who is on the hook for that?

The first report is a repeat of the now familiar story:

  • Our ratings outlooks for the Australian financial institutions sector for 2013 generally are stable. By contrast with the U.S. and Europe over recent years, the significant majority of our ratings on Australian financial institutions have stable outlooks, and our most likely scenario is that this will not change in 2013.
  • We believe that the prospect for rating upgrades in 2013 is low, and that there is a greater possibility of rating downgrades. That said, our current view is that negative ratings transitions are less than a one-in-three possibility for the Australian major banks and most other rated financial institutions during 2013.
  • Our expectation for 2013 is that most economic and industry risks affecting the banking sector are manageable for most Australian financial institutions at current rating levels. These include our likely base case outlook for risks associated the Chinese economy, industry sectors negatively affected by the high Australian dollar, commodity prices, and property sector risks. Economic and industry risks that could be most likely to cause negative ratings momentum include those associated with Australia’s high external debt and relative dependence on external borrowings.

With the usual acknowledgement that it is actually you, the tax-payer – that is the reason the bank’s have ratings this high:

We note that even if the stand-alone credit profiles (SACPs) of the Australian major banks were to improve by one notch, to ‘a+’ from ‘a’, this would not cause us to raise the issuer credit ratings to ‘AA’ from ‘AA-‘. While the Commonwealth of Australia (AAA/Stable/A-1+) is considered highly supportive of the banking sector, and we believe that the four Australian major banks are highly systemically important and therefore would be the beneficiaries of direct government support (in the unlikely event it were required), our ratings criteria envisages that fluctuation of the major banks’ SACPs could occur anywhere in the ‘a-‘ to ‘a+’ range for them to be rated ‘AA-‘. We believe that the prospect for rating upgrades for most regional banks and smaller retail financial institutions is fairly remote.

And the outcome if the Federal budget were to deteriorate? You guessed it:

‘A+’ from ‘AA-‘, all other rating factors remaining equal and unchanged, would be if our local currency issuer credit ratings on The Commonwealth of Australia were lowered to ‘AA+’ from ‘AAA’. The concomitant rating action on the banks would reflect our view that the four Australian major banks would continue to benefit from government support but not to the same extent, in consideration of the government having less capacity to provide extraordinary support (in the unlikely event that it were required).

So nothing new here, except of course that nothing has changed.

More interesting is the second report, about New Zealand property, which reckons:

  • In our base case scenario we expect that strong asset quality ratios are likely to be maintained at levels supportive of banks’ current ratings.
  • Potential risks to the banking sector include a sharp correction in property prices and a disruption in funding access.
  • Should economic risk buildup and the Economic Risk score be lowered to ‘4’ from ‘3’ the ratings on New Zealand banks could be lowered.
  • The issuer credit ratings and outlooks on the major banks remain linked to those on their parents.

The last sentence is the kicker. Through a chain of guarantees – Australian government > major banks > NZ subsidiaries – it appears the Australian tax-payer is also on the hook for New Zealand’s even large property bubble. S&P goes on:

That said, given the uncertain short-to-medium term outlook for the global economy, we are of the opinion that there remains a significant risk of a sharp correction in property prices.

We believe that a scenario that may lead to such a weakening of New Zealand’s macro-economic factors is a deterioration in the terms of trade or a widening in the current account deficit from its current cyclical low, which could heighten the risk of a sharp depreciation in currency and a sharp fall in property prices. In our view, such a scenario, in conjunction with a rise in unemployment, could increase the risk of a significant rise in banks’ credit losses, on the back of a build-up in housing prices and domestic credit over the period that preceded the global financial crisis.

We are of the opinion that such a scenario would have a material impact on the financial strength of the balance sheets of New Zealand banks.

The report concludes:

The outlooks on the four major banks remain linked to those on their respective parents. Potential triggers for a downward rating action on the four major banks could be a significant weakening in the rating on their respective Australian parents, or our assessment that their support to the New Zealand banking subsidiaries has significantly weakened.

We consider that the SACPs on all the New Zealand banks remain exposed to the risk of a sharp correction in property prices as a result of a weakening of New Zealand’s macro-economic factors. In our view such a scenario could include a deterioration in the terms of trade or a widening in the current account deficit from its current cyclical low. Should such a scenario materialize it could lead us to assign a higher risk score for economic imbalances, which could put pressure on our economic risk score under our BICRA assessment.

We are also of the opinion that there remains a significant risk of disruption in the banking sector’s access to funding, given the sector’s material dependence on external borrowings. In particular, we consider the New Zealand banking system’s sensitivity to a disruption in external funding could be more pronounced during a period of rapidly depreciating currency, falling property prices, or increased credit losses. Nevertheless, we consider that the major banks are likely to benefit from their parents’ support in normal as well as most stress scenarios.

Exactly right. I find it hard to envisage any scenario in which the majors were not on the hook for their kiwi progeny. An interesting scenario might be that New Zealand’s property bubble pops and Australia’s does not, leading to a downgrade in the subsidiary rating that moves up the chain to the Australian majors. New Zealand is small but not that small.

Anyways, it is a oft-unexplored chain of connections that does see Australian tax-payers also carrying the risk for New Zealand’s property bubble. It’s conceivable that we’d end up paying for kiwi losses if both property markets went under simultaneously and whatever shape the bailout took in Australia would trickle down to New Zealand through subsidiary recapitalisations. It’s perhaps more important now that even now we’re paying, through the inhibitions placed upon the budget owing to liquidity guarantees for the banks and their kiwi offshoots.

Very generous is the Australian tax-payer.

David Llewellyn-Smith


  1. …and…..“New Zealand’s terms of trade unexpectedly fell to a three-year low in the fourth quarter…The terms of trade have now declined for six straight quarters …” All NZ needs to do is borrow (even) more to fill the gap, and….Hang about!…What does this mean for our interest rates….which means what for our property market….and so …yours…

    • Very generous is the Australian tax payer ? you make it sound like they had a choice, it was the Australian government and the wealthy that backed the banks, the average Australian never wanted that. ALso, so many Kiwi’s work in Australia, pay taxes but we don’t get unemployment benefits if we lose our job, so our taxes bail you guys out in some ways, yet as far as I know KiwiLand does pay Australians unemployment and does pay education for Australians.

      With the government having to most likely extend land boundaries to free up land because of the bubble that a few local councils have created I would say the NZ property market is going to be at high risk.

      And didn’t the NZ gov depart from backing the Major4 ?

  2. The prudental standard APS 222 – Related Entites prohibites ADI’s from providing a related entity with a general guarantee or having cross-default provisions.

    There is nothing legally enforceable between the Aus ADIs and their NZ subs compelling the parent to pick up the tab if NZ crashed and burned.

      • HnH – Maybe for ANZ and to a lesser extent westpac but the others all have local NZ branding (BNZ, ASB etc).

        Sure there’s the reputational risk and you’ll take a massive hit on credit ratings but what we’re talking here is if an Australian bank required a bailout by the Aust Govt due to the failure of an NZ sub. If that’s the scenario in play I can tell you now that the NZ Govt would not be getting away scot free.

        You can bet London to a brick that if the shoe was on the other foot and it was an Australian property meltdown, the first thing the RBNZ would do would be to appoint inspectors over the NZ subs, eize control over all the assets and ban any movement of excess assets up to the parent.

      • Especially for the likes of ANZ, how would asian countries that ANZ has expanded into react if ANZ was not seen to burn a subsidiary.

    • Probably right. But would you as, say, ANZ want the world to see how you stood by your subsidiaries (or didn’t in this case)when push come to shove in what is widely seen as just another Aussie State ?

      • There is also the risk of straight nationalisation if they didn’t. Might not be so disagreeable if the bust were that bad but it’s throwing away a lot of hard work.

        • I don’t know that we could afford it! Arguably we nationalised South Canterbury Finance, to the tune of a gross $1.6 billion and 50% of the “Leaky Homes” liability. The earthquake should have been catered for by the EQC Fund, but that was proven to be deficient ( besides The Big One the EQC Fund was for, was for Wellington – not Chch – and that’s still due!). The RBNZ Open Bank Resolution Policy sees to be where we’re headed. If a bank goes down….good luck creditors….which I guess is Head Office in Melbourne/Sydney in the final analysis.

    • That doesn’t mean they won’t do it, particulalry if it is a slow burn and the Australian parents get called for a say 15% recapitalisation or subordinated convertible loan, and then again a year later, and then again….

  3. If the NZ subsidiaries went pear-shaped, there would be a lot of political pressure on the NZ government to chip in for the bailout.

    • But the NZ Government is actually making noises about restoring housing affordability by forcing councils to abandon UGB’s.

      Propping up house prices by foul means is not smart or moral. The wealth transfers upwards in society get worse and worse the longer this goes on. “Protecting the finance sector stability” means “protecting the racket”. There has to be a better way.

      • Alex Heyworth

        There is, but the question is how to get there without deflating the bubble all at once and causing a massive recession, impaired financial system etc.

        • What happened in NZ in the 1970’s was a lucky accident rather than deliberate policy. But a few years of high inflation at the same time as a property bubble was deflating, allowed property prices to revert to a sensible mean without anyone going into negative equity.


          By Rodney Dickens (NZ economist)

          “…..From the peak in the national average real house price in the December quarter of 1974, the national average house price increased less than prices in general for the next five years. House prices didn’t fall over this period, but because prices in general increased significantly more, the real value or purchasing power of the average house fell 40%. The fact that inflation in general averaged close to 15% per annum
          over this period meant that the sins of the bubble in house prices between 1970 and 1974 could be washed away over the subsequent five years without requiring actual house prices to fall. This experience will have helped create the myth that house prices never fall much. But be in no doubt about the implication of the 40% fall in real house prices over the five years after December 1974. Anyone buying a house at the peak
          of the speculative bubble in 1974 and selling it five years later will have lost 40% in terms of the purchasing
          power or real value of the money they invested. Again, people consume goods and services not dollar coins, so what really matters is real house prices……”

  4. as a kiwi you have to laugh, CER at its best. Seems like Aus is holding the world together! You can also throw the UK in as well I guess given NAB’s exposure to some unsuccessful UK ventures.

  5. tsport100MEMBER

    Moodys already rate ANZ B- (borderline junk) but with the implicit guarantee that becomes AA2.

    Moody’s posted a new rating for ANZ on 27th Feb 2013 but it’s a subscriber only file (not a good sign surely lol)

  6. sounds like the Aussies want to receive the huge profits these banks make but don’t want to take the risk on from making those profits…. please ,I’d love to have some of our banks back , should have never been flogged off in the first place. too many NZ companies are sold offshore.

  7. Oh I can’t wait,
    The thought of a bunch of Today viewers writing letters to the editor and on talkback whining about bludger kiwis yet failing to see the issues in their own backyard, Fair Dinkum I just vomited in my mouth.