another 45 point rise from the banks coming?

Based on short term money markets a major source of australian bank funding – short term rates, have increased by about .75% just since early Jan..

About .25% was recouped by the banks when they hiked their rates independently of RBA.. But it looks like there is more pressure on them to raise again substantially in addition to any March rise… possibly up to .45% in addition to March rise..

On another note, Macquarie Banks CDS (credit default swaps have risen by a whopping 190 points).. meaning for them to secure their bonds in wholesale market and attain higher rating they are having to pay a massive 1.9% more..

Yikes i thought Australia was going to be relatively immune.
 
Trendsta,

Welcome to the global economy! ;)

I don't like mechant w&^kers so I prefer get mortgages from people who rely on deposits....not fancy products called sub-prime mortgages or credit default swaps.

I do agree with your point that we have not seen an end to the banks passing on further credit costs on top of RBA increases.....I can seeing Glenn Stephens breathing a sigh of relief. :D

Sash

Based on short term money markets a major source of australian bank funding – short term rates, have increased by about .75% just since early Jan..

About .25% was recouped by the banks when they hiked their rates independently of RBA.. But it looks like there is more pressure on them to raise again substantially in addition to any March rise… possibly up to .45% in addition to March rise..

On another note, Macquarie Banks CDS (credit default swaps have risen by a whopping 190 points).. meaning for them to secure their bonds in wholesale market and attain higher rating they are having to pay a massive 1.9% more..

Yikes i thought Australia was going to be relatively immune.
 
Yes, bank bill yields point to further increases by the banks. Rates above 10% by year end is a done deal.

Based on short term money markets a major source of australian bank funding – short term rates, have increased by about .75% just since early Jan..

About .25% was recouped by the banks when they hiked their rates independently of RBA.. But it looks like there is more pressure on them to raise again substantially in addition to any March rise… possibly up to .45% in addition to March rise..

On another note, Macquarie Banks CDS (credit default swaps have risen by a whopping 190 points).. meaning for them to secure their bonds in wholesale market and attain higher rating they are having to pay a massive 1.9% more..

Yikes i thought Australia was going to be relatively immune.
 
Yes, bank bill yields point to further increases by the banks. Rates above 10% by year end is a done deal.

I don't see it happening Muzz.

Another rate rise in March will mean 2 so far this year alone (or is it 3 - I've lost count there's been so many lately) .

Easter is next month, and being the last really publicised "consumer scramble" for the year until Xmas (maybe the Queen's B'day sales in June) there is not a lot of buying going to done for the rest of the year by the sheeple.

Add to that the property slow-down, which apparently has started and which will definitely start with another rate rise and lots of media attention, and I'm tipping by the end of the year there will be the first rate drop in a while. Maybe around November. Could be October.

Mind you; the usual "consumer carnage" that occurs in December might prompt another rise, but I think by then we'll have had a drop, so it won't be as big a concern.
 
Welcome to the global economy! ;)

I don't like mechant w&^kers so I prefer get mortgages from people who rely on deposits....not fancy products called sub-prime mortgages or credit default swaps.

I do agree with your point that we have not seen an end to the banks passing on further credit costs on top of RBA increases.....I can seeing Glenn Stephens breathing a sigh of relief. :D

Sash

Sash, do you even know what a CDS actually does? Or what subprime is? They're hardly things you 'rely on' to make mortgages. If you will only deal with a bank that doesn't securitise..... you won't find any. The big 4 securitise, just not as heavily. And without those non-deposit-taking-bank lenders, you would have been paying higher rates anyway in the last couple of years. Why do you think the banks all offered discounts to the standard variable rate? Competition. From guess who? Other lenders following deregulation.

I really don't know why property investors, of all people, would complain so much about the banks. Surely we understand that they are necessary for our business, and that there is plenty of choice out there. Talk about biting the hand that feeds us.....

Admittedly I'm biased. I like banks in general because I make money from property investments funded by bank loans, I make money on bank shares, and I work for one so they pay my salary. I don't like any individual bank, but surely it's hypocritical for US to criticise the banks as an industry. And WE complain when people say that landlords shouldn't increase rents even though our costs have increased.
Alex
 
Alex,

Gee Alex.....for a moment there I thought I detected a crack in the cool composure there...lol! ;)

Yes, agree with you that the banks are a neccessary evil. However, I also object to the nice cushy margins the banks enjoy here vs overseas. Here they have about 1.25% margin vs cost of funds sitting at 7.7%....overseas their margins are a lot less...sometimes as low as 0.5%.

Also, I mentioned that I did not like Merchant Banks products...as opposed to traditional banks. They seem to come up with off the wall products with all risk to the customers. The retails banks are a lot more conservative.

Having said that ......I personally would like to see more banking competition in Australia.....perhaps bringing in more foreign banks in would set the cat among the pigeons. The banks in OZ do not service their customers well when compared to other countries. Nothing like competition to get the big 6 banks moving. :eek:

As to plenty of choice....yes and no is the answer. The real issue is that the banks tie you to them with ridiculous exit fees and X-collateralisation. I would like to see more legislation here...I think the labour government is working on this. ;)

Sash, do you even know what a CDS actually does? Or what subprime is? They're hardly things you 'rely on' to make mortgages. If you will only deal with a bank that doesn't securitise..... you won't find any. The big 4 securitise, just not as heavily. And without those non-deposit-taking-bank lenders, you would have been paying higher rates anyway in the last couple of years. Why do you think the banks all offered discounts to the standard variable rate? Competition. From guess who? Other lenders following deregulation.

I really don't know why property investors, of all people, would complain so much about the banks. Surely we understand that they are necessary for our business, and that there is plenty of choice out there. Talk about biting the hand that feeds us.....

Admittedly I'm biased. I like banks in general because I make money from property investments funded by bank loans, I make money on bank shares, and I work for one so they pay my salary. I don't like any individual bank, but surely it's hypocritical for US to criticise the banks as an industry. And WE complain when people say that landlords shouldn't increase rents even though our costs have increased.
Alex
 
Trendsta,

Welcome to the global economy! ;)

I don't like mechant w&^kers so I prefer get mortgages from people who rely on deposits....not fancy products called sub-prime mortgages or credit default swaps.

I do agree with your point that we have not seen an end to the banks passing on further credit costs on top of RBA increases.....I can seeing Glenn Stephens breathing a sigh of relief. :D

Sash

Sash you may be pleasantly surprised that due to record low Australian savings and deposits (worse than even US), even the big4 have to source money through non traditional means - short term money market or selling bonds in wholesale market (most likely London or New York)... This is even more so for smaller lenders like RAMS etc etc...all this information is publicly available on RBA website..

You will be even more delighted to hear that to ensure bonds that are sold in the wholesale market are rated highly and pay the minimum possible yield to the buyers of these bonds the banks buy insurance (called CDS) .. so if the bond fails the insurers pays the investors.. also banks pay less yield to buyer of bond since its insured.. end result is cheaper money for moms and pas in australia to fund investment properties.

Now if you look at the credit markets two things are apparent.. yield the banks have to pay bond investors is going up.. the yield? banks have to pay to bond insurers is SKYROCKETING!

Now the banks can turn to deposits.. but guess what .. there arent any because everyone is paying debts, there are no savings..

They can go to short term money markets and guess what... "inverse yield currve" with short term debt rising fast ! Only so long a bank can borrow at higher rate in short term and lend at lower rate for a pre-longed period ..

The other question that comes to mind is :
What would you do if u were an investor in London and NY looking to buy these bonds, especially after seeing bonds secured by UK and US property collapse??

Would you care they are rated AA (not even AAA like some of the US cr-ap). Would you trust the rating? Would you care they are insured by a bond insurer that has no money?

In the end with all this in mind what yield would you charge to an Australian Bank with bonds secured by Australian property (which according to international reports is amongst highest in developed world), and backed by defunct bond insurers...

ooo ... not looking good.
 
Tendsta

Interesting.....low savings? What about superannuation? :p

If they target low risk mom and pop housing loans they could get about 9%....compared to a unstable share market? Also, I am sure the bankers know housing is still low risk compared to other areas....

Interesting isn't it?:D


Sash you may be pleasantly surprised that due to record low Australian savings and deposits (worse than even US), even the big4 have to source money through non traditional means - short term money market or selling bonds in wholesale market (most likely London or New York)... This is even more so for smaller lenders like RAMS etc etc...all this information is publicly available on RBA website..

You will be even more delighted to hear that to ensure bonds that are sold in the wholesale market are rated highly and pay the minimum possible yield to the buyers of these bonds the banks buy insurance (called CDS) .. so if the bond fails the insurers pays the investors.. also banks pay less yield to buyer of bond since its insured.. end result is cheaper money for moms and pas in australia to fund investment properties.

Now if you look at the credit markets two things are apparent.. yield the banks have to pay bond investors is going up.. the yield? banks have to pay to bond insurers is SKYROCKETING!

Now the banks can turn to deposits.. but guess what .. there arent any because everyone is paying debts, there are no savings..

They can go to short term money markets and guess what... "inverse yield currve" with short term debt rising fast ! Only so long a bank can borrow at higher rate in short term and lend at lower rate for a pre-longed period ..

The other question that comes to mind is :
What would you do if u were an investor in London and NY looking to buy these bonds, especially after seeing bonds secured by UK and US property collapse??

Would you care they are rated AA (not even AAA like some of the US cr-ap). Would you trust the rating? Would you care they are insured by a bond insurer that has no money?

In the end with all this in mind what yield would you charge to an Australian Bank with bonds secured by Australian property (which according to international reports is amongst highest in developed world), and backed by defunct bond insurers...

ooo ... not looking good.
 
Tendsta

Interesting.....low savings? What about superannuation? :p

If they target low risk mom and pop housing loans they could get about 9%....compared to a unstable share market? Also, I am sure the bankers know housing is still low risk compared to other areas....

Interesting isn't it?:D

errr right .. supperannuation saved as deposits... kinda makes the multi-billion dollar wealth management industry and whole supperannuation scheme defunt .. how will the investment bankers keep paying absurd prices for waterfront properties. :)

cant see it happening unless govt want to bear the hundreds billions in social cost, in future.

they did target low risk mom and pop .. all over the world .. then many moms and pops (in US) couldnt pay and the bond values collapsed.. i c you havent been reading financial news at all since july last year. :p

do they really?? A super fund that invested billions in these bonds will see these facts:
1. House prices have gone down in US, and are going down in UK, Spain, and other countries.
2. sub-prime housing problems in US caused massive collapse in CDO and other bond value, even though they were rated AAA and backed by 'low risk' resi property and insured by bond insurers.
3. Here is an Australian bank selling AA (at best) rated bonds
4. Housing market in Australia is still going strong. It is at its highest level (australian median), and has highest income/price ratio and lowest affordability ration in decades. Economy is going well and IR are going up. According to IMF and OECD reports housing is overvalued and a concern, and has been for few years.

they will not think "oh wow Sash has a property which he can service easily his salary in syd-bourne, the property rents are going up 10%, and a new shopping centre is going up in the neighbourhood, hence i am safe". They will not look at the micro factors that a property investor evaluates.. they will look at the bigger picture.

Risk is a perception.. your perception of a risk vs how a superfund, hedge fund etc perceive and calculate risk is different. The credit markets will show this to you.

At the moment it looks like the only thing they are buying is the debt with a soverign stamp, hence treasury yields falling.
 
That's one effect of securitisation. Because thousands of loans are lumped together and sold to faraway people who may not know the market where those loans are made, much less the individuals, they depended on the credit ratings. Now that the ratings are suspect, banks of all stripes are going to find securitisation much harder. Which means less money to lend and higher rates. For ALL banks, since they all use securitisation in one form or another. Sure the Big 4 have bigger deposit bases, but it certainly doesn't cover all their loans. The non bank lenders (especially the ones not owned by other banks or strong companies) will raise their rates by MORE, but the Big 4 will keep raising their rates as the credit crisis unfolds regardless of what the RBA does.

Super is NOT cash savings. It's invested in shares, etc.

That was the whole point about the subprime crisis. They managed to make what had historically been relatively safe loans (loans to people for homes) risky by lending to people who didn't have the income to pay.

It's not a matter of 'the bankers won't withdraw their loans from the housing market because the alternative like the sharemarket is even riskier'. It's a matter of the banks just having less money to lend, so they WILL cut back on loan growth. Because they have no choice. If you have no money, you can't lend.

All that stuff about personal incomes and increasing rents and so on concern our ability to service debts at a PERSONAL level. It's important to us as individuals, but the overseas pension funds, etc who buy those mortgage backed securities from aussie banks aren't going to care. We're not even a number in that world. We're just one very small part of a number.
Alex
 
Trendsta,

Oh! Are you refering to the Fin Review...I think I occaisionally read that paper...lol...lol. ;) Just kidding....read it every day!

So this thing called the sub-prime crisis was caused by low risk moms and pops eh? :p

So ARMs (Ajustable rates of mortgage) products sold by the merchant banks had nothing to do with it...when they sold loans at 5% which rose to 9% in a period of 3-5 years to people who least understood them? Or the underestimatation of demand and supply in the US? Or that the credit standards in the USA is different to Australia...where the Uniform Credit Code protects PPOR buyers? Or that the bureaucracy and the Mortage Broker governance (i.e MIAA) are putting controls on brokers.

So you think that Australian housing is overvalued....eh...because the IMF and OECD said so....lol? When do you expect prices to drop....let me know if they will drop 40%....I have a line of credit established to buy, buy, buy...this is despite what the media and economists saying so!

Where will we house the 180k immigrants and 180k new babies? Have you tried renting.....in Sydney, Melbourne, or Brisbane? What's up there...with rent auctions and queues of 40 people fighting over a property in Sydney's Inner West and Eastern Suburbs....nah....must be the oversupply? How come rents are going up by 10-15% in Sydney?

Trendsta....not having a go....but I think a lot of experts seem to be confused as to what is really happening in the market. Whilst, I think some parts of Australia (i.e Western Sydney) could be affect like the US....most of in OZ will ride out the sub-prime crisis. Why....because China and India are increasingly self reliant...they are not as reliant on the US. Apart from the UK....the rest of the EU is traveling, not great but ok.

I wait for more pearls of wisdom from you.

Sash
PS - Can I be brave and say that the RBA will be falling over themselves to cut rates later this year when they realise their rate increases have gone overboard......:D



errr right .. supperannuation saved as deposits... kinda makes the multi-billion dollar wealth management industry and whole supperannuation scheme defunt .. how will the investment bankers keep paying absurd prices for waterfront properties. :)

cant see it happening unless govt want to bear the hundreds billions in social cost, in future.

they did target low risk mom and pop .. all over the world .. then many moms and pops (in US) couldnt pay and the bond values collapsed.. i c you havent been reading financial news at all since july last year. :p

do they really?? A super fund that invested billions in these bonds will see these facts:
1. House prices have gone down in US, and are going down in UK, Spain, and other countries.
2. sub-prime housing problems in US caused massive collapse in CDO and other bond value, even though they were rated AAA and backed by 'low risk' resi property and insured by bond insurers.
3. Here is an Australian bank selling AA (at best) rated bonds
4. Housing market in Australia is still going strong. It is at its highest level (australian median), and has highest income/price ratio and lowest affordability ration in decades. Economy is going well and IR are going up. According to IMF and OECD reports housing is overvalued and a concern, and has been for few years.

they will not think "oh wow Sash has a property which he can service easily his salary in syd-bourne, the property rents are going up 10%, and a new shopping centre is going up in the neighbourhood, hence i am safe". They will not look at the micro factors that a property investor evaluates.. they will look at the bigger picture.

Risk is a perception.. your perception of a risk vs how a superfund, hedge fund etc perceive and calculate risk is different. The credit markets will show this to you.

At the moment it looks like the only thing they are buying is the debt with a soverign stamp, hence treasury yields falling.
 
So this thing called the sub-prime crisis was caused by low risk moms and pops eh?

So ARMs (Ajustable rates of mortgage) products sold by the merchant banks had nothing to do with it...when they sold loans at 5% which rose to 9% in a period of 3-5 years to people who least understood them? Or the underestimatation of demand and supply in the US? Or that the credit standards in the USA is different to Australia...where the Uniform Credit Code protects PPOR buyers? Or that the bureaucracy and the Mortage Broker governance (i.e MIAA) are putting controls on brokers.

Yes, the subprime thing was caused by banks selling risky loans to supposedly low risk moms and pops. The ARMs are a big part of the subprime problem. But you're somenow separating the customers and the products. They sold ARMs to mom and pops.

The term ‘merchant bank’ doesn’t really have any meaning anymore since they no longer ban banks from doing both retail and investment banking. Would you call Citibank an investment bank or a retail bank? How about Countrywide? Golden West Financial?

What does underestimation of supply and demand (though how you can do BOTH at the same time is beyond me) have to do with anything?

So you think that Australian housing is overvalued....eh...because the IMF and OECD said so....lol? When do you expect prices to drop....let me know if they will drop 40%....I have a line of credit established to buy, buy, buy...this is despite what the media and economists saying so!

No, whether Australian property is overvalued is in fact irrelevant. Prices can be right on fundamental value, and if liquidity evaporates it can still drop. Prices can drop below fundamental values. Given the sort of yields we saw in the late 90s, wouldn't you say that was probably below fundamentals? The availability of credit underpins the property market. There is no doubt there is less liquidity than before.

Where will we house the 180k immigrants and 180k new babies? Have you tried renting.....in Sydney, Melbourne, or Brisbane? What's up there...with rent auctions and queues of 40 people fighting over a property in Sydney's Inner West and Eastern Suburbs....nah....must be the oversupply? How come rents are going up by 10-15% in Sydney?

I still don’t get the part where increasing rents automatically leads to increasing prices. In many ways rents and prices go against each other, because a person who doesn't buy has to rent. And the person who decides not to buy an IP means one less IP available to be rented.

Does this mean increasing prices also leads to increasing rents? Why did rents fall for so long, especially relative to prices, during the boom? I do think there is a shortage of housing, but that doesn’t have to fuel prices: it can just fuel rents instead.

So why are Western Sydney prices falling while rents are rising?

PS - Can I be brave and say that the RBA will be falling over themselves to cut rates later this year when they realise their rate increases have gone overboard......:D

The only reason the RBA would cut rates this year or any other year is if the economy is in danger of going into (or already in) recession. Do you really think prices will keep rising in a recession?
Alex
 
Yes, the subprime thing was caused by banks selling risky loans to supposedly low risk moms and pops. The ARMs are a big part of the subprime problem. But you're somenow separating the customers and the products. They sold ARMs to mom and pops.

The term ‘merchant bank’ doesn’t really have any meaning anymore since they no longer ban banks from doing both retail and investment banking. Would you call Citibank an investment bank or a retail bank? How about Countrywide? Golden West Financial?

What does underestimation of supply and demand (though how you can do BOTH at the same time is beyond me) have to do with anything?

Hmmmm...very interesting Alex...very true! I have a feeling your work for a Merchant Bank...would I be correct? Lets look at a different way would your average Retail Bank Manager have recommended an ARM?

No, whether Australian property is overvalued is in fact irrelevant. Prices can be right on fundamental value, and if liquidity evaporates it can still drop. Prices can drop below fundamental values. Given the sort of yields we saw in the late 90s, wouldn't you say that was probably below fundamentals? The availability of credit underpins the property market. There is no doubt there is less liquidity than before.

Overvalued is relative...yes currently there is tightening of credit and thus it is costly to borrow. But when interest rates fall....it is another story....particularly if property values don't move as fast and rental yields head towards 6%.

I still don’t get the part where increasing rents automatically leads to increasing prices. In many ways rents and prices go against each other, because a person who doesn't buy has to rent. And the person who decides not to buy an IP means one less IP available to be rented.

Does this mean increasing prices also leads to increasing rents? Why did rents fall for so long, especially relative to prices, during the boom? I do think there is a shortage of housing, but that doesn’t have to fuel prices: it can just fuel rents instead.

The situation this time is slightly different in Sydney....developers are not buidling because they can't produce a competitively priced product. This in turn is causing rents to increase rapidly. By the time the RBA figures out that food prices have stabilised and rents are increasing due to cost of money...it will get interesting....this is where government policy important.

So why are Western Sydney prices falling while rents are rising?

Western Sydney is falling because house prices which were around 90-120k in 90s rose far in excess of fair market value to 380-450K...now it is being repriced. At some point....Sydney will look cheap compared to Melbourne and Adelaide. Already the yields are better.....still has some room to drop further before investors get in. Already you are buying houses at land value in Western Sydney.



The only reason the RBA would cut rates this year or any other year is if the economy is in danger of going into (or already in) recession. Do you really think prices will keep rising in a recession?
Alex

Give the RBA a bit more credit....they will lose credibility if they send the economy into recession....thus why the sabre rattling in the press. Can't see a recession happening in OZ....again India and China are keeping Australia afloat. Also Australia is no longer as reliant on just SE Asia, USA and Japan. We have diversified our export base....also domestic demand is still strong. If you want to know where we are heading look at NZ....the RBA has dramatically slowed the economy but unemployment is still low (about 3.8%).
 
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Am I missing something here??? While the read is entertaining, I for one, am thinking this should be in the "www.letstalkeconomics.com.au" forum...:)
 
That will be $50 bucks for the show...HandyAndy888.....lol! ;)

Yes, it is getting like that isn't it.....unfortunately....rate rises, CDOs, are all economics related....but they have a large bearing on property investment. :D



Am I missing something here??? While the read is entertaining, I for one, am thinking this should be in the "www.letstalkeconomics.com.au" forum...:)
 
Hi Sash,

I think you mis-understood my post.
But, Alex has answered all your questions in great detail. I am of the same view as he.

As Alex aptly put it "whether Australian property is overvalued is in fact irrelevant".

HandyAndy,
Thats fine. I suppose further interest rates dont affect you at all. So you can ignore this thread. I thought since most people borrow, and some borrow many millions here it would be of interest to know where that money comes from and understand whats happening now. Two choices either:

1. understand that and as some on this forum have done mitigate that risk, or
2. whinge "bl-oo-dy banks, they're so greedy and want all our money"...
 
Give the RBA a bit more credit....they will lose credibility if they send the economy into recession....thus why the sabre rattling in the press. Can't see a recession happening in OZ....again India and China are keeping Australia afloat. Also Australia is no longer as reliant on just SE Asia, USA and Japan. We have diversified our export base....also domestic demand is still strong. If you want to know where we are heading look at NZ....the RBA has dramatically slowed the economy but unemployment is still low (about 3.8%).

The RBA is a thermometer not a furnace.
 
Give the RBA a bit more credit....they will lose credibility if they send the economy into recession....thus why the sabre rattling in the press. Can't see a recession happening in OZ....again India and China are keeping Australia afloat. Also Australia is no longer as reliant on just SE Asia, USA and Japan. We have diversified our export base....also domestic demand is still strong. If you want to know where we are heading look at NZ....the RBA has dramatically slowed the economy but unemployment is still low (about 3.8%).

sorry mate, i dont follow.

so are you saying Australian economy will slow and inflation will fall thus RBA will drop rates?

or are you saying China/India are growing strongly as well as domestic consumption, and despite this RBA will drop rates?
 
Okay, Trendsta.

Agree on your point about trying to understand where your funding comes from. But disagree on relevance of whether property is overvalued...as this causes asset bubbles and bankers would get nervous.

I guess...our discussion is matter of opinion...I guess only time will tell. Having said that...I will be glued to this forum as some of the discussions have given me some fine ideas! :D

Cheers
Sash


Hi Sash,

I think you mis-understood my post.
But, Alex has answered all your questions in great detail. I am of the same view as he.

As Alex aptly put it "whether Australian property is overvalued is in fact irrelevant".

HandyAndy,
Thats fine. I suppose further interest rates dont affect you at all. So you can ignore this thread. I thought since most people borrow, and some borrow many millions here it would be of interest to know where that money comes from and understand whats happening now. Two choices either:

1. understand that and as some on this forum have done mitigate that risk, or
2. whinge "bl-oo-dy banks, they're so greedy and want all our money"...
 
Hi Sash,

I think you mis-understood my post.
But, Alex has answered all your questions in great detail. I am of the same view as he.

As Alex aptly put it "whether Australian property is overvalued is in fact irrelevant".

HandyAndy,
Thats fine. I suppose further interest rates dont affect you at all. So you can ignore this thread. I thought since most people borrow, and some borrow many millions here it would be of interest to know where that money comes from and understand whats happening now. Two choices either:

1. understand that and as some on this forum have done mitigate that risk, or
2. whinge "bl-oo-dy banks, they're so greedy and want all our money"...

True Trendsta, true...I am interested in risk mitigation, I wouldn't be reading this thread...but it just started to waffle on a bit about the same old same old..interest rates are interest rates...they go up and down, and according to a poll here recently, most investors don't care about them...:)
 
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