Australian Bank Downgrades Called “Bizarre”

March 7, 2012 by · Leave a Comment
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Writing for the Sydney Morning Herald, Ian Verrender first accuses the big three rating agencies of “having missed every major financial crisis or corporate collapse in the past 20 years.” He then confronts them for “jumping at shadows” when Fitch downgraded three of Australia’s four largest banks for having “suddenly discovered Australian banks have borrowed heavily overseas and, apparently, there has been some kind of financial trouble in Europe.”

Mr. Verrender then continues to complain, “That bizarre announcement was followed yesterday by an even more laughable proposition from Standard & Poor’s. It breathlessly announced that Australia’s banks could well be at risk if China’s economy collapses. But if China’s economy has a ”hard landing”, as the agency postulated, there’s certain to be more than just our banks that will suffer. Try our resource companies for starters. Try the global economy for seconds.”

He writes that Australia’s Reserve Bank governor Glenn Stevens is also at a loss to understand the downgrades. He told the Senate that other Australian companies have a far greater risk profile but are rated higher than the banks. Likewise, Mr. Verrender points out that the banks were at far greater risk three years ago when the federal government covered their debt and insured their deposits.

He concludes that the problem facing the banks is the demand for loans has shrunk “alarmingly.” By downgrading the banks and making it more expensive for them to borrow (and lend), it exerts even more downward pressure on loan demand.

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