It's deja vu all over again.

This is not unique to BHP. I think I remember IBM raising cash even cheaper.

Few Australians realise how much wealth that 1% that the "occupy" movement resents, actually control. US "T" bills pay incredibly low interest but no matter how much they issue there are "takers". These takers are "old" money whose main interest is return OF capital, not return ON capital. Big corporates are seen as safer than the US G'ment and paying a little more so they get a hearing.

Theoretically our banks are safe and fund managers aren't idiots, so why can't they get "cheep" money? There is not much currency risk.
 
Ahh I think I have got it. BHP regardless of reporting country would be trading with China / India et al in US dollars....

True. BHP's profitability improves as our $ goes down. But in a sense they are the ultimate currency hedge. :)
 
Ahh I think I have got it. BHP regardless of reporting country would be trading with China / India et al in US dollars.... As US treasuries are effectively paying negative returns when adjusted for inflation the American money market must be funding company bonds like these as these types of prices. No hedge required for BHP, sweet deal.

The banks though? Why can't they do similar even with a hedge? Well think about the aud$ versus the USA$ over the last 5 years. How would insurance against those swings? It must just be that?

I think in most cases you pay or get paid for the difference in yield between the two currencies when you hedge anyway.

There is a time cost when hedging a low yield currency like bonds in $US against a high yield one like AUD which means you end up back where you started anyway as though you took the deposit in AUD in the first place.

I think they issue in foreign currencies just because there is more of a market for bonds in other countries and currencies than Australia and these markets want the bonds in thier own currency or $US not AUD. They get paid in their local currency and a yield relevant for their own currency but by the time the likes of combank get it hedged back to AUD they are paying the local yield anyway even if the initial deposit was in $US.
 
Not sure if people here understand - but hedging is a very expensive exercise. Even for a 2-year forward on AUD/USD you'd be paying at least 7% above current spot rate, maybe even more. That means 3.5% extra each year has already been built into your pricing - which negates a lot of the benefit from borrowing overseas. Definitely not worth it for retail investors.
 
Actually BHP doesn't take the exchange rate risk because they report in USD anyway

and where are some of their asset bases, BHP is not just an australian company anymore.

A more intelligent review of this situation would be to break up their international debt structure against their international asset structural.

I have no interest in resource companies, so i havent done any such analysis, but this might/might not be a useful heads up for someone out there.
 
So a couple of weeks pass and the sense of "we've been here before" hasn't abated.

Covered bonds, which were to be a cool new source of funds and take the pressure off locally, have proved expensive and less popular than hoped.ANZ and Westpac end up paying the equivalent of 150bps over bills, which excites CBA so much they "delay" their plan to issue.

An auction of German gov 10 year bonds is badly under subscribed.

The Germans, FFS!
 
There's that glitch in the Matrix again.

One misstep to an Aussie bank calamity

Directors of Australian banks will need to make some hard decisions given what is happening to their counterparts in Europe. If our banks make the correct decisions, the events in Europe will not cause an Australian banking crisis although they will still cause some pain.

If the Australian bankers make the wrong decisions, then we will have a credit squeeze and dangerous asset price fall. Or putting it another way, Australian bank chief executives are about to really earn their money and if they fail, they will be put on the scrapheap.

First let’s look at what is happening in Europe.

I wonder how the directors of the big European banks sleep at night. They know that they are concealing from their shareholders and the community the fact that they have lost their capital (and much more) punting on high interest rate government debt. They know that the European recession will hit their loans around Europe, although in that case they were prudent and spread their risk.

It seems the European bankers have put the whole thing in the too hard basket and hope governments will bail them out. But bailout or no bailout, the bankers will have to raise huge amounts of capital to cover their losses or fail. Many will simply fail but local depositors may be protected.

The European situation is a reminder that bankers are capable of making very bad decisions and this was underlined this week when the chief executive and co-chief investment officer of Pimco, Mohamed El-Erian, writing in the FT, pointed out, “a growing number of European banks are now either materially or wholly dependent on the European Central Bank and related facilities to survive. The situation is particularly acute for those banks that previously relied on wholesale funding, (my emphasis) which has essentially disappeared, and those suffering deposit outflows, which are accelerating in very troubled countries such as Greece.“

It is clear the European banks not only desperately need much more capital, but will need extra help as well.

Until yesterday, Australian banks could still access the same wholesale funding markets although the lenders wanted much higher interest rates (Skeletons in the banking cupboard, November 24). But outgoing Commonwealth Bank chief executive Ralph Norris told Fairfax media that as of today, those wholesale markets had been frozen for all banks, including Australian banks. This may change, but it is very dangerous.

The problem our banks face is that they will be tempted to respond by making the criteria for making loans to Australian customers much tougher and so adjusting bank balance sheets to reflect the conditions.

If they do that, then Australian banks will reduce asset prices and lift their bad debts. If Australian bank bad debts rise then wholesale money will be even harder to obtain and even more expensive. It will be a vicious circle.

In home lending consumers have borrowed too much and are very sensitive to cost. Reserve Bank official interest rates must fall. In the business arena the cost is usually less important than the availability. It is very important at this time that Australian banks keep funding the business community. If they turn down the money tap at a time when some European banks are taking action to close down their Australian loan book, we will have a major problem.
 
Hi Token Funder,

I read that article by Robert G the other day on Business Spectator and thought it a very good one. A lot of the stuff published on that site is very informative.

Would welcome your perspective on the European situation and how it might play out. As I posted elsewhere, I believe Europe will have no option but to print at some stage. At present they keep kicking the can down the road without taking decisive action that changes the game. Austerity measures won't work. Europe needs a Central Bank with authority to print. Germany will hate it, but its the lesser of two evils. At some point they will need to inflate their Euro problems away in the same vein as the US.

But I'm not privy to international money market insights. Would welcome the thoughts from someone who works in the banking space.

Cheers,
Michael
 
Okay, TF. We get RG's point. But what's your point in reciting his entire article? (Forgive me for asking, but I had actually come to expect more than mere unreflective dogmatism from you.)

Lazy effort but had to get on a plane...will be more reflective in due course ;)
 
There is still another chapter here:
Whilst Germany and France are telling other EU countries how bad they have been behaving, the are somehow glossing over the fact that their own banking institutions are also bankrupt. Not in case of default, but as of now. Well actually it's been since the GFC.
Their posturing is only to serve their own needs, but the PIIGS are well aware of this, which is why their attitude is basically "it's your problem too! Point that finger at us, and we say stick it up yourself!"
 
So my good friends at CBA just issued $3.5B in covered bonds with a 5 year term at 175bp over bank bills.

That's around the 6% mark, people.

For secured borrowings!
 
So my good friends at CBA just issued $3.5B in covered bonds with a 5 year term at 175bp over bank bills.

That's around the 6% mark, people.

For secured borrowings!

Its insane, isnt it.

What is the average NIM for banks these days - low 200's?

If these funding costs don't come down in a few months retail rates will move sharply upwards unless there are more base rate cuts (and even that won't fully help).
 
Its insane, isnt it.

What is the average NIM for banks these days - low 200's?

If these funding costs don't come down in a few months retail rates will move sharply upwards unless there are more base rate cuts (and even that won't fully help).

Crazy.

And then you start to do the maths on what unsecured bonds might now price at.....
 
So my good friends at CBA just issued $3.5B in covered bonds with a 5 year term at 175bp over bank bills.

That's around the 6% mark, people.

For secured borrowings!
Makes a person think when you read something like this and just when CBA
is on the upward trend,good or bad for long term shareholders like myself
who started at $10.45 and have held the can all along the way..:)..
 
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