23/11/2011 - 11:09

Beware the incredible shrinking cash supply

23/11/2011 - 11:09

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Australia can’t avoid being affected by the looming global shortage of available money.

Australia can’t avoid being affected by the looming global shortage of available money.

WHAT good are lower interest rates if banks have no money to lend? That troubling situation could emerge if the ‘capital strike’ we are watching in Europe spreads worldwide, which it might.

Australia, even with its isolation and relatively healthy national balance sheet, will not avoid being caught up in a global shortage of available money.

The first local example of money going on strike, which is a curious concept to grasp, was the withdrawal of the German bank WestLB from a funding deal with the emerging silver miner Cobar Consolidated.

Despite agreeing last March to be part of a $22 million funding syndicate to help pay for the Wonawinta mine in NSW, WestLB was ordered by head office in Dusseldorf to walk away from the deal, forcing Cobar into a last-minute, discounted, issue of new shares and a revised deal with the Commonwealth Bank.

Cobar’s crisis is not an isolated incident because most European banks, which are major players in the resources funding business, are under head office orders to minimise lending outside the Eurozone while that region’s financial system continues to melt down.

Resources will not be the only sector hit by the retreat of the European banks because a number of commercial property deals also look like unwinding, with high-rise real estate on Queensland’s Gold Coast likely to be the first market hit by foreign banks going home.

Royal Bank of Scotland, a British bank hit hard during the original 2008 GFC, is reported to be selling Gold Coast apartments that fell into its hands when the owners found they owed more than the apartments were worth.

What’s happening is that banks in Europe, with an estimated $US3 trillion in loans outstanding in countries outside the Eurozone, are retreating to the safety of their home countries in fear of a total collapse of the grand European experiment in nation building.

In effect, the failure to create a United States of Europe, which is on display daily in the soaring interest rates on bonds issued by the governments of Greece, Italy, Spain, Portugal and France, is infecting the global banking system, with no cure in sight, yet.

A second German example of what a capital strike means was a decision two weeks ago by Commerzbank, which announced that it had ‘suspended’ all lending outside its home market, except Poland; so what the small team at 410 Collins Street in Melbourne is doing these days is anyone’s guess – packing up, perhaps?

Australia, thanks to its close trading ties with China and new best friend in the US, will muddle through the European financial tragedy, but will not avoid suffering some side-swipe damage as European money rushes home to shore up a crumbling banking system.

That’s why the recent cut by the Reserve Bank in local interest rates was a welcome pre-Christmas gesture, even if 2012 looks like a year when the owners of money will demand an increased reward for lending the stuff if, in fact, they are prepared to lend at all.

Older readers will recall that Australia experienced events like this in the 1960s and 1970s when the Reserve Bank ordered commercial banks to simply stop lending, no matter how good the customer, or the risk.

This time around the Reserve Bank would like to see lending continue. It’s the banks that are worried about their exposure to risk, and the stability of other banks, especially those from Europe. 

Gold rush

CONVENTIONAL money is not the only form of cash under pressure, because recent events in the gold market indicate a fascinating tussle between buyers and sellers, which could mean that the gold-price boom of the past 10 years is running out of puff.

No-one is tipping a total collapse of the gold market, but there are signs that big buyers of gold have turned into sellers as part of the dash for cash caused by Europe’s problems.

John Paulson, widely-regarded as one of the world’s leading gold bulls, showed his cards last month when he sold close to $US1 billion worth of gold held in the SPDR Gold Trust for clients of his fund management company.

After the sale of units in the SPDR trust, the world’s biggest exchange-traded fund, Paulson’s funds were left with a still very substantial $US3.5 billion in gold and the status of biggest holder of SPDR units.

Why Paulson sold gold has not been explained. It is possible that he needed the cash to plug holes left by problems elsewhere in his portfolio, and gold was the quickest and easiest way to raise liquid capital.

Whatever the reason, Paulson’s $US1 billion sale is a reminder that gold is not a one-way bet and when the going gets tough it is an easy asset to sell, which is something troubled European banks and private investors might also be thinking about.

Too much uranium

OPENING India to Australian uranium sales might not deliver the boost that supporters of the local uranium industry imagine – because the world is not suffering a shortage of the nuclear fuel.

In fact, uranium today is in plentiful supply thanks to the permanent closure of 14 nuclear power plants in Japan and Germany after the Fukushima accident.

Not only did that mean 14 customers stopped buying, their stored fuel needs to find a home. One estimate is that if even a quarter of the uranium held by Tokyo Electric (owner of the Fukushima power plant) hit the world market it would be the equivalent to the opening of a big new uranium mine.

Cup runneth over

NOT everyone is feeling financially stressed. Larry Ellison, founder and chief executive of the Oracle computer software company, is investing $US300 million in trying to breathe life into the moribund America’s Cup sailing competition.

For that outlay, Ellison gets his boats for the 2013 competition in San Francisco plus the creation of a 130-member travelling television team, which has the job of making a yacht race interesting to outsiders.

The team is armed with 50 cameras on the course and on the boats, plus advanced computer graphics to try and answer the critical question when boats take different tacks when sailing into the wind ... who’s in front?

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“When you come to a fork in the road – take it.” 

Yogi Berra.


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