02/11/2011 - 11:16

European banks play safe, close to home

02/11/2011 - 11:16

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Unpopular they may be, but truth is the world needs bankers.

A WORLD without bankers might sound idyllic to some people, but they have probably never understood the meaning of the old saying ‘be careful what you wish for’.

Loudest calls for a cull of bankers have been heard recently at protests in New York and elsewhere under the banner of ‘Occupy Wall Street’.

While understandable, and perhaps even commendable when thinking about the extreme greed of some bankers, the reality is that the world simply cannot function without them – as we hopefully will not discover in the aftermath of saving Europe.

Praised, at least in the early days as a rescue that had to happen, the truth about the latest European financial stability agreement is that the financial world as we have known it is being radically altered, especially on the question of credit risk.

Boiled down, that means the rules of borrowing money will be a lot tougher; available funds will be rationed, businesses will find it harder to expand, and fewer jobs will be created – with that final point being furthest from the minds of protestors attacking banks.

The case of Cobar Consolidated, explored last week in an online WA Business News column, was a warm-up for what will happen in the next few years as business discovers that European banks have retreated into their safety zones closer to home.

Cobar had negotiated a $38 million loan with Australia’s Commonwealth Bank and Germany’s WestLB, or at least it thought it had until WestLB’s head office in Dusseldorf ordered a withdrawal, forcing Cobar to rush out a discounted share issue.

Expect more of the same in the future as European regulators demand that banks under their control raise an extra €106 billion ($141 billion) in fresh capital to shore up their balance sheets.

That amount of money is not easy to find, and wherever it comes from the price will be high because it is unlikely existing shareholders will be keen put up the extra €106 billion, which means it will have to come in the form of government loans, asset sales, retained profits and reduced lending.

Governments injecting more capital into the banking system is simply delaying tactic that will lead to more and bigger write-offs than those imposed last week on lenders to Greece. Retaining profits and lending less means business growth will be stifled.

And if Australians think they will dodge the banking bullet of reduced lending and tougher credit rules, then they’re not looking at the reliance on overseas funds to keep our banks functioning – with the level of foreign borrowings in the Australian banking system more than doubling from 11 per cent of total funding to 24 per cent over the past 20 years.

Just how tough it is becoming for bankers can be seen in the massive job losses sweeping through the sector, a point conveniently overlooked by the Occupy Wall Street mob.

Latest job cuts have come from three of the world’s biggest banks – Deutsche, UBS and Nomura. UBS alone is planning to sack a further 1,700 employees on top of the 3,500 dismissed over the past six months.

Much of the pain being felt in the banking sectors has been self-inflicted, and the cuts are essential for some of the banks to survive.

But if the Occupy Wall Street mob had its way, and the banks were forced to make even deeper cuts, the consequences for the wider economy would be dire.

Bankers might not be loved but it would be hard for the economy to function without them.

Price of climate fame

SAVING Europe has been occupying so much time and energy of the Western world that everyone seems to have forgotten about a bigger job – saving the world.

Another step down that ultra-ambitious road will be taken on November 28 when true believers in man-made climate change gather in the South African seaside city of Durban for the 17th meeting of the (pause for breath) United Nations Framework Convention on Climate Change, or UNFCCC among friends.

Disregarding the nonsense of the name, though it does say something about the bureaucracy behind the debate, it seems this latest gathering of politicians and scientists who are making a living out of talking about climate change will be a disappointing affair.

Most countries, apart from Australia, have shifted climate change into the ‘pending’ basket because there are more pressing issues to consider. Britain has just scrapped a carbon capture proposal for Scotland. Germany has also suspended a similar proposal and European climate change leaders are avoiding expensive commitments to the concept.

Last week, the European Union’s Climate Action director general, Jos Delbeke, told the Wall Street Journal newspaper that: “In reality, what may happen is that Europeans will pronounce themselves politically in favour of the Kyoto Protocal (on climate change), but won’t lock themselves into any new anti-carbon pacts unless other parties join the club”.

The US, Japan and Russia are even more definite in their positions, saying a new anti-carbon pact will not happen until China and India sign up – with both those countries saying they will not.

Which should make Australia the star of the two-week Durban gabfest, whether we want to pay the price of stardom, or not.

Rent’s role

IF Western Australia is booming, why aren’t residential property rents higher? That’s a question arising from the latest survey of movements in home rents costs, in which only one Perth suburb made the top 10. According to the survey, the town with fastest growing rents is the historic NSW coal-mining centre of Lithgow, where rents rose by 38.6 per cent last year.

East Perth took fifth spot on the list with a rise of 28.9 per cent but it was one of only five Perth suburbs to make the top 50, a fraction of the 25 Sydney suburbs in the top 50.

For property investors that might seem like bad news, but they are last year’s figures, which could mean that we’re overdue for a big rise in rents.

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“Business and life are like a bank account – you can’t take out more than you put in.”    

William Feather


STANDING BY BUSINESS. TRUSTED BY BUSINESS.

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