Sack the sorcerers along with the apprentice. That the Prime Minister’s senior staff waited so long to tell Julia Gillard what the duty press secretary Tony Hodges had done before the incident at the Lobby restaurant beggars belief. Senior press secretary Sean Kelly and Communications Director John McTernan left their boss vulnerable to saying something wrong and thus looking like a political goose. So it proved. They should be sacked as well as Hodges for a complete lack of judgment.
The banks’ interest rate margin campaign begins. With a cut in official interest rates favoured to be decided on by the Reserve Bank board tomorrow week, the campaign by banks not to pass all of any increase on is underway.
A couple of banking old-timers in Don Argus and David Murray played their part this morning with quotes for the page one splash in The Oz and were joined by National Australia Bank chairman Michael Chaney in what clearly was a softening up process. Which doesn’t mean to say they were wrong in pointing towards an increased cost of funds for banks that are putting margins at risk. It’s just that in the welter of available statistics there is not a regular series that makes publicly available what is actually happening.
The best independent guide I found this morning was a paper published in the Reserve Bank Bulletin for March last year, The Effects of Funding Costs and Risk on Banks’ Lending Rates, which summarised the situation thus:
After falling for over a decade, the major banks’ net interest margins appear to have stabilised in a relatively narrow range in recent years. In the early part of the financial crisis, margins fell to the bottom of this range, reflecting an increase in debt funding costs. Margins have since recovered a little, to around the middle of the range, as a result of some repricing of lending rates relative to these costs. In addition to the increase in the cost of debt funding, there have been other drivers of the rise in lending rates relative to the cash rate. First, the banks have increased their equity funding, which is more costly than debt finance. Second, risk margins on loans have risen to account for higher expected losses.
Perhaps the accompanying graphs tell the story better than the words.
Those net interest rate margin figures certainly don’t look to me like banks deserve the opprobrium that politicians have heaped on bankers when they failed to pass on all of previous Reserve Bank cuts.
But it would be helpful in interpreting the future actions of banks to have regularly updated official figures.
An Olympian effort. You really do have to wonder why countries do it. They fall over each other every four years to bid to hold the Olympic Games in what is a sure fire way to knock off billions of taxpayer’s money. You can mark the 200 Sydney games as the start of the slide by New South Wales into a financial mess and now it is London’s turn to pay the price of grandstanding by politicians.
But surely the most spectacular example of Olympic folly is Greece. Consider this from a story at the weekend in the London Daily Telegraph and never trust what a politicians tells you again.
In 2004, with Greece a member of the euro, the conjuring trick was becoming transparent. A new, centre-right government was elected, with Peter Doukas appointed Budget Minister.
“I asked the senior staff of the ministry to give me details of the budget that had been passed the previous December,” says Doukas. “I said don’t worry about persecution or anything, just tell me the true story.”
The difference between the published deficit and the real one was huge. “[It] was about 7 per cent of GDP. The budget said the deficit was 1.5 per cent. The real shortfall was 8.3 per cent.” Under the Maastricht treaty, member states must keep their budget deficits below 3 per cent of GDP.
So what did he do? “I said we should start chopping down the budget. But the answer I got at the time was: ‘We have the Olympic Games in a few months and we cannot upset the whole population and have strikes and everything just before the Olympic Games.’”
To meet the deficit, Greece borrowed and borrowed. Banks queued up to lend. The markets did not believe there was a risk of default because Greece’s currency was locked into that of Germany.