Reserve Bank chief Glenn Stevens last night issued a warning to Australian banks about the threat to stability posed by international private equity buying up Australian businesses.
It was by no means alarmist scare-mongering, but according to some commentators it was designed to achieve two things. One, to get a warning on the record about the dangers of debt well ahead of any future recession, and two, to alert the big four banks to their profits disappearing overseas.
“It’s right and proper that regulators and commentators are highlighting some of the risks, and those responsible are doing the right thing in addressing the issues publicly. Through what they are saying at an appropriate point in the cycle, they are doing a public service,” Saul Eslake, chief economist at ANZ, told Crikey.
Crikey business commentator Michael Pascoe agrees there’s not an imminent threat of 1987 repeating itself, but says it certainly provided a backdrop to the RBA chief’s comments.
“Prices aren’t ridiculous yet, but they’re getting warm and are on the rise. The only real concern for the RBA and APRA is that our banks don’t get carried away with their lending the way they did in 1987. The RBA has learned a lot since then and not yet forgotten it, so expect closer supervision of and warnings to the banks – but of course we’ve already seen the banks here (NAB, ANZ) saying similar things that they are aware of the problem.”
Of course, the endgame of rampant, debt-funded business buyouts in an environment of rising interest rates is an economic meltdown similar to that of Black Monday, 19 October 1987. Professor Mike Rafferty, senior lecture in International Business at University of Wollongong, says that despite everyone claiming to be aware of the dangers, caution is still required, and not only to keep an economic shock at bay.
“What’s very clear is that these private equity firms are outsiders and they can buy the biggest companies in Australia. One would expect the RBA to be a little bit worried about that. The RBA and government exist in a political world and the four big banks in Australian have the lion’s share of financial activity and these PE firms are a threat to their dominance. So the RBA can mask it as a prudential matter, but they’ve also got to protect the existing financial institutions.
“Stevens has taken over after one of the longest economic booms and will possibly preside over a recession and I think that’s what he’s positioning himself for. Should there be a recession he’s preparing the groundwork for saying we were monitoring it.”