Today marks the the second RBA meeting in a row where the board has met as eurozone debt woes and fears about Greece have been rattling markets. The RBA highlighted those concerns in the minutes of the September board meeting and the latest concerns will get a big mention in the minutes of today’s meeting.
The local market opened weaker and remained that way in morning trade ahead of the Reserve Bank board meeting which won’t change rates. The Australian dollar fell under 95 USc this morning as fears about Greece, some European and US banks and China’s economy hit the currency.
August building approvals and the trade figures from the Australian Bureau of Statistics were much better than forecast with the trade balance hitting a $3.1 billion in the month as exports jumped 8%. Building approvals rose 11% in the month as well.
But the good news ends at our shores: world markets slumped overnight Monday, some to 12-month lows (in the case of the US) as Greece confirmed that spending cuts won’t see the budget deficit hitting targets agreed to with its lenders, the IMF, ECB and EU. While not significantly new (Greece meeting budget targets would be BIG news) or disastrous, the markets certainly took it as such as they tumbled across the globe.
Gold rose, but copper and oil again fell, hinting that markets see the world economy tipping into recession. That was despite reasonable reports on the health of the Chinese, Japanese, British and US manufacturing sectors, but not Europe’s, which continues to contract. Amid the selling overnight, talk emerged of the first rescue of a eurozone bank in the present crisis.
Dexia, the French-Belgium-Luxembourg government-controlled bank, is reported to be holding talks about splitting itself into two banks to try to handle rising worries that its holdings of Greek and Italian debt will drag the bank down. Dexia, which was one of the first European banks rescued in the GFC in late 2008, holds nearly €31 billion of sovereign debt issued by Greece, Italy and other troubled eurozone countries, according to media reports. It’s shares have fallen by 40% in the past three months.
Talks over Dexia’s future came as eurozone finance ministers met in Luxembourg to consider whether Greece will get the next €8 billion bailout advance. That would be the sixth advance under the 2010 bailout facility. As yet, no word of any progress on the loan. That’s not a surprise, as IMF, ECB and EU officials (called the “troika”) are still crunching the budget numbers in Athens.
As at midnight European time, the Dexia board meeting and the eurozone finance ministers meeting (which is also talking about expanding the €400 billion stability facility) were still going without a statement on either issue.
Dexia’s woes remain a key the key for markets in the next day or so. The French and Belgian Government would be asked to guarantee the so-called bad bank that will hold the problem loans. The last thing the eurozone is want a banking crisis affecting the credit standings and ratings of Belgium and France, ostensibly both rated Triple A, but in reality the next two on the worry lists for markets after Spain and Italy, which are already being helped by the European Central Bank.
Back in northern Europe, the meeting of the Dexia board (which includes former French and Belgian government officials) was called as the bank’s shares fell 10% in early trading Monday after a warning from the Moody’s credit rating agency that Dexia’s rating could be cut.
Moody’s said the bank faced “worsening funding conditions in the market” for banks had triggered the new warning. Moody’s repeated concerns aired in early July, when it downgraded Dexia.
“In Moody’s view, Dexia has experienced further tightening in its access to market funding — even to short-term unsecured funding — since the most recent rating action on July 7,” the warning said. In other words, there’s a credit squeeze that is hurting Dexia more than other banks in France. The squeeze has been happening for two months as US investors withdraw loans and deposits to banks in France and other eurozone countries, as well as the rest of Europe.
The Financial Times and Reuters reported that the bank is discussing with the Belgian, French and Luxembourg governments a move to put the dud sovereign debt loans into a “bad” bank, along with other non-performing local government loans, with the good loans and other assets in a “good” bank.
Dexia is a funder of local government in France but has retail operations in Belgium and Turkey as well as a solid funds management business, which is one of the leading operators in Australia through Ausbil-Dexia. More than €5 billion was pumped into Dexia in late 2008 after its strategy of borrowing short and lending long to local governments for infrastructure and other projects, came unstuck. That strategy caused Northern Rock in Britain to collapse and brought down the huge HRE mortgage and property bank in Germany at a cost of €110 billion.
The French, Luxembourg and Belgian governments have a majority stake in Dexia either directly, or through various government investment fund.
News of the Dexia discussions rattled other banks across Europe and in the US with the struggling Bank of America seeing its shares fall 9.6%, while Citigroup shares were down 9.8%. Leading US investment bank, Morgan Stanley continues to be the subject of intense speculation as its shares fall. They lost 7.7% overnight, which came on a 10% plunge last Friday.
The European Central Bank meets on Thursday night our time and is tipped to not only cut interest rates (despite eurozone inflation hitting 3% in August), but also reveal plans to more directly support eurozone banks. If that occurs, it will be seen as a possible precursor for the gradual default of Greece.
One of the ways the Greeks say they will cut spending is by putting 30,000 public servants into a special reserve, paying them 60% of their previous wages, then sacking them after a year, if that will ever happen in a country where social unrest is rising!
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