S&P just downgraded the entire financial sector. The timing is suspicious, but I just can’t figure out who’s pulling the strings.
Ok, this is another story that really isn’t getting the air-time it deserves.
Effectively, S&P just downgraded the entire Australian financial sector. Yep. The entire Australian financial sector.
Effectively, they said that yes, actually, there is a property bubble. And that bubble is, in fact, dangerous. So much so that every Australian financial institution is more of a credit risk than they were before.
Yep. Every one.
Oh, but not the majors. No. The big four are too big too fail, the tax-payers have their back, so no worries there.
What’s more, the timing of this is really breath-taking. Just as the smaller banks were looking forward to a more even playing filed thanks to the big bank levy, bam, they’re hit with a ratings downgrade, making them even less competitive.
The Bank of Queensland CEO is pissed. Oh man.
And this almost certainly feeds through into the interest rates we’re looking at. For the 23 smaller banks affected, their cost of funds just got more expensive. What can they do? They’ve got to pass it on…
But the timing of all this really makes me think that there’s something going on behind the scenes that we just can’t see. I’m not sure what that is, but I have three theories.
But let’s recap in case you missed it because this story really isn’t getting the attention it deserves. So Standard and Poors (S&P) – a ratings agency which effectively tells people in the money market how credit-worthy other institutions are – has downgraded 23 financial intuitions in Australia.
They did it all in one go, effectively saying that an “increased risk of a sharp correction in property prices” was now a threat to the entire Australian financial system.
So we’re talking all our regional banks – BOQ, Bendigo, Adelaide Bank, BankWest…
The “big four” banks, however, managed to escape a downgrade because S&P believes they are likely to receive “timely financial support from the Australian Government” if something happens to the property market.
But then, after going on about the dangers of a “sharp correction in prices” and “economic imbalances” they do admit (so far towards the end of the press release that it’s practically a footnote), that actually, the “outlook for Australian banks remains relatively benign by global standards”.
So like, worry, but don’t worry too much.
It really is bizarre.
This isn’t about any institution in particular. Effectively they’re saying the entire Australian financial system is now a riskier prospect…
… because why?
What do we know now that we didn’t know at the beginning of the year?
They don’t point the finger at anything in particular. If something passed some sort of threshold to trigger a downgrade, they don’t say what it was.
And given everything else that’s going on in the past couple of weeks – with the bank levy and APRA’s second round of intervention, it just looks a little suspicious to me.
But I don’t know where to point the finger…
I’ve got three theories.
Theory One: It was the Big Banks
This is the most seductive theory. Effectively the big banks are so annoyed that the government turned around and stabbed them in the back with the Bank Levy, that they went out and had a quiet word to their mates/puppets at S&P.
As I said last week, I expected the big banks to come up with something big, and quickly. They have to hit back. They need to send a strong message, otherwise the Bank Levy could just go up and up and up.
Getting the entire financial system downgraded is a pretty strong message. Especially, when you get off scott-free yourself.
How do you like those apples, Morrison?
Theory Two: It was the government
At the same time though, this whole fiasco just focuses everyone’s attention on the reality that there’s one set of rules for the Big Four, and another for everyone else.
One of the best rationales for the Bank Levy was to claw back some of the funding advantages the Big Four got from their implicit government guarantee.
I don’t think most people understand just what a free kick this is.
So perhaps the government had a word to their mates/puppets at S&P and said, look, we need something that shows just how sweet the Big Four have it. If you wanted to downgrade all the minors, we won’t get in your way.
And so far the government has been surprisingly quiet. It is the kind of thing you’d normally expect to generate a lot of outrage.
S&P also downgraded China last week and the government there said that S&P had no idea how the Chinese economy actually worked.
But there’s nothing but crickets in Canberra.
Theory Three: It was the RBA and APRA
Another theory that holds as much weight in my mind is that it was the RBA and APRA.
So far this year there’s been a real shift in the tone of our regulators’ public statements. When it comes to housing, they’re suddenly talking tough.
Effectively, the RBA and APRA seem keen to “talk their way out of the problem”.
This is a classic play for the RBA. Remember 2003 when they started fretting about the “Sydney bubble”. A few warnings and a couple or rate hikes successfully took the heat out of that market, and things settled down.
We’re seeing the same strategy in action now. Rates are on the rise through APRA restrictions, and there’s a lot of jaw-boning going on. They’re successfully reshaping expectations.
The S&P downgrade fits perfectly into the narrative they’re trying to create. Economic imbalances have built up, and things need to be unwound in an orderly way.
So maybe the RBA and APRA had a word to their mates/puppets at S&P and said, look guys, a downgrade would really help us out right now – just a little one, just a little shot across the bows.
But which is it?
All of these scenarios seem plausible to me. But really, there’s no way to know. What do you think?
But at the end of the day, the least likely scenario in my mind, is that an independent ratings agency just decided to downgrade the entire financial system of an advanced economy, right in the middle of one of the most electrically charged political and economic climates in recent memory.
I’m not buying that for a second.
What do you reckon?