By Bernard Hickey
A major change in the relationship between savers and New Zealand banks is about to happen with little public debate.
This change also presents a real risk to New Zealand's economic rebirth as a nation of savers, investors and exporters from being a nation of consumers, borrowers and importers.
Yet again, there has been little public debate about a new policy that could derail the Government's and the Reserve Bank's hopes for transformation.
So let's start.
New Zealand's banks have launched a massive drive to borrow up to NZ$32 billion from mostly European investors through the issue of covered bonds. Legislation to back these covered bonds is about to go through parliament.
These covered bonds are new to the New Zealand banking landscape, but they have been around forever in Europe, where the European Central Bank estimates there were 2.4 trillion euros on issue at the end of 2008.
They allow banks to essentially carve off a bunch of mortgages on their balance sheet and sell them to investors. The interest payments are 'covered' by interest paid to the banks by home mortgage borrowers and the assets in the bonds are 'covered' by a pool of assets in the bank. They're a bit like securitised mortgages, also known as Residential Mortgage Backed Securities (RMBS), but the mortgages are written by the banks and stay on the balance sheets. These covered bonds often carry AAA credit ratings, which are higher than than banks' own ratings.
The key difference between covered bonds and any regular bond issue or RMBS is that covered bond holders move to the front of the queue in the event of any crisis at the bank. That's one reason why they carry higher credit ratings.
The Reserve Bank explains here in its public consultation paper issued in October how they work:
In broad terms, a covered bond is a similar instrument to an RMBS, but the primary difference between an RMBS and a covered bond is that covered bond holders have dual recourse to both the assets in the cover pool and to the issuer.
An RMBS only offers single recourse to the assets contained within the RMBS structure. With covered bonds, investors are protected by high quality collateral, over-collateralisation, and a preferential claim on the cover pool, and by an equal claim to any residual assets of the issuer.
The key phrase there is 'preferential claim'.
Queue jumping bond holders
This means the covered bond holders have jumped ahead of regular term depositors in the queue. This is the reason they have been banned in Australia, which has provisions in its Banking Act
to ensure regular term deposit savers are first in the queue. Although this week the Labor government in Australia signaled it would allow all banks, including the four pillars (ANZ, Westpac, NAB and CBA) to start offering covered bonds.
There is nothing specific in our legislation to stop our banks from issuing them. However, the Reserve Bank initially suggested banks not issue covered bonds worth more than 5% of their assets. Now the Reserve Bank is pushing to get legislation governing the issuance of these bonds and has proposed a doubling of that limit to 10%, which is worth NZ$32 billion. See more on that here from Gareth Vaughan, who has covered this subject extensively.
See all our articles on covered bonds here.
Bank of New Zealand was the first cab off the rank. It issued a 'test' issue of NZ$425 million worth of covered bonds to domestic institutions in June that cost over 6%, which wasn't much less than borrowing it from local 'Mum and Dad' investors. Then last month BNZ sold 1 billion euros (NZ$1.76 billion) of covered bonds to European investors at a base interest rate of 3.125%. Even after swapping the proceeds back into New Zealand dollars, the costs is significantly below the cost of raising funds here.
BNZ has initial plans to issue NZ$3 billion of these covered bonds to European investors and has said it may double the programme. See more here.
'Strong demand from a bombed out Europe'
Westpac New Zealand is also looking to get in on the act. Westpac has signaled plans for a 5 billion euro (NZ$8.8 billion) programme of issuance, starting in the first quarter of next year. See more here.
ANZ New Zealand has indicated it would probably issue covered bonds. See more here. ASB has also said it is open to the idea. See more here.
Part of the rush is due to strong demand from European investors worried about investing in their own debt as the European sovereign debt crisis rolls on. Putting money as far away from Europe as possible seems attractive, particularly when the story about New Zealand's connections with the Chinese-fueled Australian engine is emphasised.
From the banks' point of view it is the perfect combination. After more than two years of scrambling and paying high rates for lots of often small local term deposits, they can jump into the international markets and get hold of big dollops of cheap foreign funding.
Here's how the Reserve Bank describes it:
The primary attraction for issuers entering the covered bond market is the opportunity to gain access to relatively cheap longer term funding. Spreads between covered bonds and senior unsecured debts vary as market conditions change, but recent experience from overseas suggests that a double-A rated issuer might reasonably expect to save up to 50 basis points by developing a triple-A rated covered bond.
Cheaper, faster, deeper, wider, longer...and so seductive
The Reserve Bank has been attracted to the idea because it can help reduce the banks' vulnerability in a financial crisis like the one we saw in late 2008 and early 2009 after the collapse of Lehman Brothers. Until then the big banks obtained more than 65% of their foreign funding through short term 'commercial paper' issuance that rolled over in less than a year.
Rightly, the Reserve Bank wants the banks to extend the duration of their funding to reduce their vulnerability to another freeze.
The theory is that the banks will use the proceeds of these covered bond issues to refinance short term foreign borrowings.
But what if the banks choose to simply increase their ammunition pile of cheap foreign borrowing to go out and start lending heavily into the housing market again with low fixed mortgage rates?
All the Reserve Bank's good work in introducing the Core Funding Ratio to curb the 'Unbeatable' fixed mortgage rate campaigns will have been wasted. The extra potency given to monetary policy by a move into floating mortgages would be reversed. The upward pressure on term deposit rates, which encouraged saving and reduced borrowing, would be diluted.
It's been noticeable in recent weeks that the banks have started trimming their fixed mortgage rates, which has spurred some extra demand in the housing market. Mortgage approvals hit a record for 2010 last week of NZ$801.9 million. See more here. House prices have stabilised and are starting to heat up again in some areas, particularly those where richer buyers have just received their own dollops of tax cut cash to go on another borrowing spree. See more here.
And term deposit rates have started edging lower too as banks become more comfortable about borrowing offshore rather than from Mums and Dads at home. Remember, the Core Funding Ratio applies to both local funding and long term foreign funding. Covered bonds make it easier for the banks to meet their core funding requirements.
Looser credit criteria
It's also noticeable that many of the banks are slipping back into their old habits of offering 90% (Westpac) and 95% home loans (Kiwibank) along with discounts for legal fees and exemptions for application fees (ASB).
The rhetoric from the bank chief executives has clearly changed in the last two months. They are 'back in the game' as one CEO recently told us, referring to a new interest in growing lending and to offer home loans at up to 90% loan to value ratios.
Lending figures for the last two years show banks have continued growing lending against property, whether its in farms or in houses. Business lending has slumped. See more here.
This is exactly not what the government was hoping to achieve.
It wanted to discourage more borrowing against property and wanted to encourage more investment in productive business.
The problem with covered bonds is they risk derailing that grand economic strategy.
And they do it without compensating term depositors for being shunted back down the queue.
* This article was first published in our email for paid subscribers earlier today. See here for more details and to subscribe.
59 Comments
So the banks have previously lent money out through mortgages, and have borrowed whatever statutory amount of money they currently require to collateralise that lending. Now they are going to go an 're-sell' those same mortgages ( well, the best ones, anyway) to new lenders through the Covered Bond market. Sounds like 'selling the same asset' to two different holders to me! Or is it just New Zealand taking out a 'second mortgage' on itself?
This "game" as Spencer at the RB terms it, brings us to the watershed...will NZ slide forever into being a shite economy sustained on bank credit with the households feeding the banks the income while dependent on the govt for benefits...............or will the country kick the habit and move on to be a nation of savers no longer chained to work for the banks.
It's down to Bollard and this Cabinet......and that, is a fearful thought!
Isn't another way of looking at it that they are using your mortgage/property (and an implicit guarantee that you will be good and pay it back) as security for a cheap loan?
Better still they don't even have to involve you.
You've been used as a security to allow someone else to get that plasma/rental?
Please correct me.....
The Danish Mortgage Bond system seemed superficially similar - and then you realise that, in our case, the flow is all to the advantage/control of the bank in the middle.
Question, If things goes tits up and a deposit guarantee scheme has to be put in place like last time do Bonds come under a guarantee.
If mortgages are on sold for bonds can banks iniate mortgagee sales?
Do the borrowers from the banks have a say if their mortgages are on sold, is it disclosed to them?
I find this whole thing scary
If the holders of the Covered Bonds ever need to call on the security, we are in real trouble. But to answer your question; In that case. 'yes' the German bank ( or whoever ) that has bought the bond can sell you up at mortagee sale, even if you didn't borrow the money from them.
And I just wonder if there is a cross-guarantee on these? Say, the Aussie parent goes down over there ( improbable though that may be). Does that mean that part of their debt can be repaid from the New Zealand Covered Bonds?
I think its No, I dont see your logic at all...
To do a mortgagee sale they would have to take possession, which means a court has to agree to it....if you have been paying on time you have been meeting your contract. If the bank goes bankrupt then the receiver takes control of the mortgage and can sell it. So I dont see / understand how a court would up hold it...please enlighten me. Also you could simply go get a mortgage off another bank....so I dont see they could sell....makes no sense.
regards
Wolly has it in one !
Sadly I think I know which way the pendulum is going to go and it is not a pretty sight.
Why not a simple 75 - 80 % max mortgage limit !
Time for the RBNZ to show it's teeth.
The banks have shown they lack the intellect or integrity for other than market share and growth at any cost - not to them but to NZ Inc.
It will buy us a little more time - just a little - before compound interest, time, higher interest rates and increasing current account deficits finally get the rating agencies to say enough !
Currently $ 246 Billion - maybe $ 300 B before they stir - but stir they will.
That's 1/3 rd of a TRILLION !!!!
We are talking serious as in serious indebtedness from which there is now no escape.
One son in Oz and no return ... a story to be repeated across NZ families I fear.
NZ depositors will not be in second place they will be invisible. Consider this. Bank A collects deposits from mum and dad and lends it out as mortgages. These mortgages are then sold as covered bonds and the money raised is lent out on mortgages which are then sold as covered bonds. This money is then lent out as motgages and sold as covered bonds, and on and on and on. So mum and dads deposits can be multiplied indefinately.
It would be great, muzza! But people don't. They think "Look I have more incomme to use. Should I pay down debt, or borrow some more based on my extra income from lower rates? After all, my home is at a manageble debt level, so why save and pay tax? I know, I'll borrow and buy another investment property!".
Indeed...if over 50 years no one has lost on property...then that's a fairly rational personal decision if looked at in a simple manner....if you dont consider or ignore the risk of loss....
Say 15 years ago I would have done the same thing.....its pretty logical.....but Ive become more well read since then and can see the risks....
regards
Mortgage rates....with this specficially....I dont think we will see a change.....they can only do 10%.....
We are in a time when there is the biggest change to our society ever (peak oil)....so we have no experience as to why or what will happen......
If we dont get a meltdown (which for me is certain, as much as anything can be) they will slowly track up for a while.....if we go into a depression in 2011 I think the OCR will drop, we will see deflation & depression.....no one will be buying a house anyway....
Interesting stat, by 2015 they expect that the USA will be importing virtually all the oil it needs....by 2012 maybe 2018 we will see oil output decreasing....So the World's biggest economy will want several million bpd more inside of 5 years....
So even if it isnt 2011....its this decade....and the US is stuffed.....if the US is stuffed, so are we really....
Interesting times...
regards
Hamish, or drive the whole family of eight on a motorbike:
http://www.smosh.com/smosh-pit/articles/how-many-people-can-safely-fit-…
check foto 8
This would make a saving on our petrol bill!
1. IF the bank goes tits up. Do regular Mums and Dads who have deposits with the bank fall behind the Covered Bond investors?
2. If the answer is yes, then should the premium that Mums and Dads are paid for the deposits be higher? Doesn't it water down the security a regular depositer has?
As a bank treasurer do you (a) Package up you best performing mortgages and re-sell them at a comensurately lower interest rate to foreigners, or (b) keep** all the loans on your book and pay more to local depositors for the money ~ as the risk is spread across all the good and bad mortgages? ( **I realise that the Covered Bonds also stay on the balance sheet)
It's mathematics, JT! There's no way that treasurer will pay the local Mum & Dad's more to 'compensate them for diluted security' if the funds are available, cheaper by selling off the good stuff ~ for a second time! M&D get lower deposit rates and the added bonus of more risk! Go figure...
1. This is my understanding.....
2. By all means try getting a higher rate, let us know how you get on.....yes it does water it down....
but is it significant? they are only 10%.....so they get their 10% and the rest that is left is deposits....and I assume deposits are still second, so foreign borrowings take the biggest losses I think/assume.
However if we see another financial crisis the Govn will very probably step in to guarantee depositors or there will be bank runs....
regards
Lots of reasons to be wary of covered bonds, some more valid than others. But this is the truly terrifying quote:
... last month BNZ sold 1 billion euros (NZ$1.76 billion) of covered bonds to European investors at a base interest rate of 3.125%.
The banks are redominating our household debt away from the NZD. This is a VERY BAD THING!!!
Currently, approx 70%of NZ's foreign debt is denominated in NZD. This is great because it means that when our currency decreases in value, so does our debt. Conversely, covered bonds denominated in Euros (or whatever) will become MORE expensive should our currency decrease, pushing up mortgage interest rates and increasing the repayment burden at a time when the nations finances will already be under pressure. This is highly destabilising.
Incidentally, this will also reduce the effectiveness of the OCR , which is surprising as it is usually something Bollard is pretty hot on protecting. The interest rates charged for mortgages funded by foreign-currency denominated covered bonds, are related to the interbank rates of the relevant foreign currency - NOT the RBNZ OCR. Hence the 3.12% rate which is related to the Euro central bank rate. Given these bonds are for 7 years and that the NZD has had a volatility range of >50% of its current value over the last 7 years, this is high stakes poker for the banks and hence for the entire economy.
If we must have these dratted things then they MUST be denominated in NZD. Anything else is sheer lunacy.
Bernard - good article. We can all see more clearly now.
This is the reason I've been suggesting development of the CFR to 1) Specify the ratio of market (offshore) to non-market (onshore) funding, and 2) Specify weight of funds at longer durations of non-market funding than the CFR12-month concern, so as to ensure a +ve rate curve. Oh, and ban Covered Bonds as well. As your information shows, they seem to already be having a reducing effect on retail rates. "Sorry NZ savers, it's cheaper to use this low cost foreign money rather than encourage you to save. Say, thought about buying an investment property? It's a great way to save - and no tax to pay! And, don't worry about RBNZ's attempts at tightening monetary conditions in future, we have a wondeful range of fixed rate loan mortgages - so you'll be nicely hedged against RBNZ's efforts to restrain inflation with the silly OCR thingy - you can just ignore it. No wurries."
The two CFR modifications would also start to resolve the currency mismatch on the banks balance sheets - which is a problem. Someone recently told me:
"Borrowing in US dollars to lend in NZ dollars means exposure to the exchange rate is a major lurking risk. For the banks in NZ, their interest and repayments cashflows come in in the form of NZD, and their big outflows are USD and Euro. That gives them a strong vested interest in stability or appreciation of the NZD, makes them very unhappy about depreciation, and keeps them relaxed abut the carry trade."
Somehow that last sentence kinda grates with me for some reason?
Sure they can hedge the risk BUT, that, "...strong vested interest in stability or appreciation of the NZD,..." would still be present when acquiring funds offshore.
The negative outcomes are clear for all to see and you say parliament are about to pass legislation that will only exacerbate the problem .... funny that - not! Why am I not surprised.....
Keep up the good work.
Cheers, Les.
I can bring some money back to NZ and lend it to the BNZ. Wait a minute some of those farm loans are a bit dicky and those developers on your books look like toast,they have been lending %95 of valuation, if house values fall %30 the bank is buggered. Yeh, I want covered bonds too but Im not taking that risk for less than %7 because the NZ $ could collapse and all the security is in housing which in Deflationary times ....
http://theautomaticearth.blogspot.com/
Deflation and depression are mutually reinforcing. This is a persistent dynamic that should last at least as long as the last depression, and likely longer as every parameter is worse going into depression this time. We have more debt, far more structural dependencies (on cheap energy and cheap credit primarily), looming resource limitations, far higher expectations, a much larger population, a far smaller skill base etc.
I think we are looking at an economic catastrophe of unprecedented proportions, not a bump in the road that can be quickly consigned to history, if only we face our problems head on. In my view we are going to have to live through deflationary deleveraging, a long and grinding depression, and then quite possibly hyperinflation once the international debt financing model is broken, and with it the power of the bond market to constrain currency printing.
This could easily take twenty years to play out, and even then the upheaval is very unlikely to be over. The last time a major bubble burst - the South Sea Bubble of the 1720s - the aftermath lasted for several decades and culminated in a series of revolutions. This bubble is much larger, and the aftermath is likely to be proportional to the excesses of the preceding bubble. This is why I call the presentation I travel to deliver A Century of Challenges.
Moreover, I do not see a return to what we consider to be business as usual at any point, because our business as usual scenario is critically dependent on cheap energy, and the energy subsidy inherent in fossil fuels has been a once in a planet's lifetime deal. We are going to be living on an energy income instead of an energy inheritance, and this will mean living a life none of us in the developed world will recognize.
Yep.....I think there is always a danger with the Internet that you find self-supporting articles that agree with your point of view.....how ever at least someone else agres with how I think....!
"As I have said before, the austerity measures coming for the whole European periphery are going to be severe enough to amount to political suicide for domestic politicians to implement. I think peripheral countries will choose to leave the euro, however high the cost of doing so, as the cost of staying in the eurozone could be even higher."
2011 looks a bad year....and 2012 looks better? uh no....
Interesting talk I came across this week it looks at how much oil the US will be pumping out in 7 years time, it was given in 2008....so 2015 would suggest the US will to all intends and purposes will have virtually no oil....
Adds a whole new meaning to invading Iraq........
Anyway Im off to do some research and t ry and substantiate or not what he said.....
regards
Bernard , what currency would the Bond face be Euros or Kiwi Dollar denominated ?
And , more importantly given the current volatility in currency markets , who carries the Currency Risk.
If the currency risk is not hedged , then its a bigger risk to both the borrower or lender .
If it is hedged , then it adds to the cost .
Thanks for answers, why do I read all the commentary and go shit,
Reminds me of when the BNZ did a whole lot of lending in Swiss Francs I think, in the 80's it all turned pear shaped, borrowers lost their properties and BNZ was bailed out by govt of the day .
Still want to know do the banks have to disclose to borrowers that their mortgage has been on sold? If so who pays for the risk. If the banks don't disclose and the borrowers equity in their asset is threatened bacause the mortgage owner has gone tits up,surely the mother bank is liable ? What do bank shareholders think of all this stupidity. I was told awhile ago that the core fund index would be difficult for banks to achieve and that other ways would be found to get funds. What the hell is the reserve bank doing allowing this to happen and Keys and English, Gamblers!!!
The thing that really pisses me of is that farmers have killed themselves because banks had to be regulated with Basel II, and NZ's rural economy is doing a starve. Shame about the collateral damage, and the banks are setting NZ up potentially for another wipeout and we are still dealing with the first one. This is total BS
Janette
At some time in our past, banks became the most important industry in our economy. They are top dog, no one messes with them, governments do what ever they have to to keep them in pork.
Farming on the other hand has been in decline for years, from memory the average weekly spend on food is down from %60 of the weekly wage, to %40 in the last 40 years, and we eat better to boot.
I first leased a farm in 1985 and the writing was on the wall then, Roger Douglas was doing his bit and I got $9 for ewes and remember buying lambs in the Fielding yards for $7-$4.
We got caught up in the dizzy years from 1999 to 2008 and forgot our place. We gave our income to the bank in exchange for a loan on the farm down the road, we wanted in on the tax free capital gain game. There is no more land being made, can't go wrong the income is not important, you would be a mug not to jump in, Bill down the road has a new valuation and he's made a mil in one year. Now we have no income and falling values and the banks hold the strings. Nothing we do will make the government change sides, we may have a democracy but it doesn't go as far as to protect us from the banks, the real masters.
l
Look at farm demographics, where are the young farmers? working for Corporates, very few farmers children are coming back onto the land. Im guilty I have children in London and California, next is about to start engineering, they wont be farmers they have watched the struggle and think there is an easier way, I hope they are right.
I have family and friends with old family farms that have been in the family for years, they have been played for fools, flying all over the world, children in the best schools, houses by the beach or lake, new car and boat every two years, managers on the farms, an elite group, in fact they talk about their group, they meet monthly, Im not in it, like the skin of a onion always another layer http://www.lewissociety.org/innerring.php They are fools, now we get to find they have huge debts, loaded to the eye balls, what fools they fell for it hook and sinker, now they work for the bank, they have no future except some kind of peonage, they now only want to keep the image up and will go to any length to do it, but they have lost it, lost generations of care and prudence, they forgot the lessons of their ancestors.
I feel for you in your position I know of others who are not like my friends above but caught in the same debt trap laid by the banks. Farming is just getting too hard for many I, have friends desperate to just get out, sick of the stress. I hope you win with the banks Im hoping a low $ will keep prices up for a while yet but we need to fall against the euro and pound more. Maybe if the country gets in strife sooner rather than later it will be better for exporters. Good luck with your struggle.
Aj, I too wish Janette well.
You have some interesting obsevations as always but me thinks you are just to pessimistic. The knobs you refer to in your post are everywhere(although not prevalent down here) but hardly representitive. Most of us toil away and live within resonable means often with a second income off farm from a partner. Those you refer to deserve all they get from the bank for their pretentIous folly.
Your point about food prices falling as a proportion of income is now reverseing, as everyone who goes to a supermarket knows. With a growing population and demand for biofuels this trend is only going one way . As food producers you and I will benifit, ive no doubt.. $115 for my old ewes today up from $51 last year, milk prices rose again at auction today...etc. That half the problem with the demographics of farming, existing farmers talk it down so much it scares prospective recruits away. Its not all negitives out there by any stretch.
I am with Andrewj on this. He is painting a harsh reality but he has the big picture well grasped and is looking through the spin of a golden age of pastoral agriculture to a point a few years hence.
Yes, food may increase as a proportion of incomes but that is of little value if either a) incomes are shrinking or b) your costs of production are increasing.
Its of great value when you are in the right sector, and farming is one of the right sectors....in the future IMHO.
a) ppls Incomes will shrink, but ppl will need to eat, so they will still buy food, but other things like TVs, holidays ipods etc will all become rare.....So shares in pak'n'save make sense, shares in Briscos, DSE do not.....at least until after they have downsized, like 25% of what they are now.....So Wellington has 4 DSE's I expect just one.....thats not just bad for DSE of course, thats 3 empty commercial properties.....15? DSE staff without jobs, not buying food at lunchtime.....the knock ons are bind boggling....
b) Production is heavily based on fertilizers and pesticides...so realistically look at the cost of organic food to give you an idea of where your food bill will be going....at least 50% higher, quite possibly more....you will be growing your own....you will be making/have time to do it....you might work 4 days a week....maybe 3.....
regards
You are quoting an often used mantra based on hope, and to date without supporting logic. Try this exercise:
1. Choose a daily amount of income to spend on food. $2, $10, $20, $40 - your choice of status, family size and country of residence.
2. Allocate your food income between items found in NZ supermarkets. As a guide, $10 will buy you:
Between 5 and 7 Kg of rice
Between 5 and 7 Kg of wheat flour
A 2 Kg (size 20) chicken
4 dozen eggs
6 litres of milk (0.5 Kg of milk solids)
2 Kg of yoghurt
1 Kg of cheese
1.8 Kg of roast pork
0.5 Kg of lamb chops
0.25 - 0.7 Kg of beef (eye fillet to mince)
1 Kg of chocolate
3. Now increase your food income by 20% (due one way or another to expanding credit) and see how your consumption changes.
I am not sure how you will allocate your food budget but across a big enough demographic there will be both an increase in consumption and a larger proportion spent on the more expensive items. The most expensive items on the list I gave you were the ruminant protein commodities that dominate NZ agriculture. So demand for expensive food goes up, as does the price, followed by NZ farmers increasing production but at higher costs. The higher commodity prices inflate farm values but it is all good because credit expansion can go on forever?
Lets assume that there comes a point where interest on that expanded credit can no longer be serviced and credit starts to contract.
4. This time you have to work out how to allocate your food purchases on a decreasing budget.
My assertion is that although people still need to eat the proportion of their food budget spent on expensive ruminant protein will decrease in favour of first cheaper (from higher conversion rates) chicken and pig meats and second much cheaper vegetable proteins (wheat, corn, rice, etc.).
I agree that being in the right sector will be important, but see that being being cropping rather than production of high cost ruminant animal products for export as commodities.
In terms of costs I would suggest you look at MAF's costs for NZ dairying. With average debt close to $25 per Kg of milksolids (depending on what you include) I think you will find debt servicing is easily the biggest cost of milk production in NZ. Fertiliser costs can be less than rates (which are increasing, and out of control).
Interesting comments, It is easy to focus on the landed gentry and their behaviours but I get calls from many farmers that are on the bones of their bums trying to make ends meet.I have never been interested in capital gain it was always the challenge that was my motivation. If I have got it right about the bond issues there will be another lot of business people going to the wall sometime soon. Because no matter what banks say about agri business partners etc when it comes to the wire the banks jump ship with little conscience and cite shareholder responsibility. When I think back to my most profitable times it was when Iwas my own supply chain and value chain rearing thousands of bull beef calves. I had control every step of the way and there was no middle men. Yeah the dollar might go down and be good for exporters but I think this govt is more worried about how much people have to pay for their flat screen TV's.
I struggle to see why everyone is scared. Covered bonds are a part of everyday life in Europe (where I currently work as an auditor for a Nordic bank). The key component of banking is borrowing short (through deposits and short-term institutional funding) to lend long (to consumer and business loans etc...). As such, there is, and always will be, a liquidity and re-financing risk that needs to be managed. Hence one of the key advantages of covered bonds, as part of a DIVERSE funding strategy for a bank. It extends the average maturity of your funding, and therefore reduces risk. Obviously, entering into a long term bond has significantly higher credit risk than a short term deposit which you can exit immediately if things start to look bad. Therefore, the purchaser wants extra security. Covered bonds greatly lowers the risk to the purchaser, and therefore, the are willing to accept a lower return. This lowers the cost of funding to the bank, which can be passed back to the customer in the form of lower interest rates....
A covered bond is only one form of financing in a diverse funding strategy that includes many different products, and different lengths of maturity. I would much rather be a customer of a bank with a strong and diverse funding base (including different types of products), than a bank which is solely reliant on short-term funding that they might not be able to re-finance in the future. In which scenario do you think your deposits are safer??
Yes they get more, but is your deposit locked in for 5 years? Have you invested x million euros? Their exposure is significantly more. On a side note, Finland also has a government guarantee on consumer deposits...
Are you in helsinki Andrew? Not too many kiwis over this way.
All your covered bonds enable is greater leverage and more potential for disaster later on.
The solution to excessive leverage and a need for greater bank regulation is not to dilute the legal rights of depositors to protect insiders and shareholders.
Yes. I am in Helsinki.
How can it work out well when the consumers are now guaranteeing their own deposits to protect a mainly privately owned banking system, where only half of society gets direct benefit via higher asset prices? The only reason these guarantees were put in place was because Ireland decided to do the impossible and make the consumers of ireland liable for private debts where there is almost no hope they can ever pay those debts.
Isn't the issue that the banks need to issue covered bond to get access to deposits. If they were run in a prudent way this should never have been necessary. Banks are to big for us, they risk our economy, they steal wealth off producers and workers, they pay insidious bonuses and create a nation of people in servitude. The west needs to break up its banks and remove them from the speculative roll they have taken in our society. I think much of it began about the time credit cards evolved.
Old saying regarding intergenerational wealth: The first generation makes it; the second generation uses it; the third generation loses it.
I can think of a few farming examples where this has come true. We do our children no favours indulging them. The best gift you can give your children is life skills - financial included and they do not get these by being indulged.
SS,
looks what is happening in Europe, think our rate will stay low for long? Lamb in the UK is on average up %11 but NZ is up more.
Telegraph,
The government sold €2.4bn of the €3bn of bonds it had hope to sell on Thursday, with the average yield on the 10-year bonds coming in at 5.446pc and 5.932pc on 15-year bonds - around 20pc higher than previous auctions.
“The cost of funding for Spain rose significantly at this auction,” said Luca Cazzulani, a senior fixed-income strategist at UniCredit in Milan. “That reflected perceived deterioration of credit quality of Spain and that’s not going to bode well for their bonds.”
http://www.telegraph.co.uk/finance/financetopics/financialcrisis/820661…
The UK sheep market
http://www.telegraph.co.uk/foodanddrink/foodanddrinknews/7571494/Lamb-p…
"But this Fed policy—call it “money-printing”, call it “liquidity injections”, call it “asset price stabilization”—has been overwhelmed by the credit contraction. Just as the Federal government has been unable to fill in the fall in aggregate demand by way of stimulus, the Fed has expanded its balance sheet from some $900 billion in the Fall of ’08, to about $2.3 trillion today—but that additional $1.4 trillion has been no match for the loss of credit. At best, the Fed has been able to alleviate the worst effects of the deflation—it certainly has not turned the deflationary environment into anything resembling inflation.
Yields are low, unemployment up, CPI numbers are down (and under some metrics, negative)—in short, everything screams “deflation”.
regards
SS, this is a good site if you want to keep and eye on the meat market
http://www.meattradenewsdaily.co.uk/default.aspx?Country=Australia
"I think the resource grab is more likely to be a phenomenon operating at the level of the state than at the level of the individual, as most individuals will already have lost almost all their purchasing power. In my opinion, states will certainly engage in a resource grab, and will take supplies off the market, either by sending the tanks or the bilateral contract negotiators into resource-rich regions. "
Free trade agreement anyone?
"States know perfectly well that oil is liquid hegemonic power, and they will be trying to secure their supply in whatever way they can."
Personally I think everyday that our Pollies are morons....they cant see past their noses and are being out manoeuvred by ones that can.
regards
Poor New Zealand - fancy Kiwi bank depositers having stand in line behind the likes of covered bond holding Neopolitan gangsters. Max them out and spend looks like being the best strategy now especially since they are talking about raising GST again. Far from encouraging savings GST actually discourages savings for the simple reason that each GST rise devalues existing savings.
Hindenburg Omen has been triggered twice recently,This might be the biggy! http://urbansurvival.com/week.htm Smells like things might be coming to a head.
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