Monday, January 10, 2011

S&P spoils the party

It's an 'happy new year' all around this morning. Except, apparently, from Standard and Poors who, according to Banking Day are about to downgrade our financial system:
Persistently high rates of credit growth relative to GDP and seemingly high property prices could filter into lower credit ratings for banks as Standard & Poor’s revises its approach to credit analysis.

Amid numerous recent reviews of methods applied by the ratings agencies, in light of the credit shock, one S&P review is producing results that will demand attention by investors in bank debt and other securities.

On Friday, S&P published a series of papers on its revised criteria for rating banks, and on which it seeks comment by early March.

While S&P noted, in its media release, that the proposals “would have a modest impact” on banks, changes in ratings of one notch or more (and both up and down) are in prospect.

In the case of Australian banks the risk of a ratings change appears to be a downside one.

One of the papers summarises S&P’s latest work on its “Banking Industry Country Risk Assessment” or BICRA score. These scores range from one, the safest, to 10, the riskiest.

At present, S&P includes Australia’s banking industry as one of six banking markets scored as a “one”.

Under the new approach, the S&P BICRA score for Australia’s banking industry is, tentatively, a “two”.

Banking Day is unsure how this national financial system downgrade will affect individual bank ratings but it doesn't make a lot of sense to downgrade a system then endorse its main parts. Looks like funding costs are going up again with all that that entails.

This blogger has obtained the preliminary assessment as well as the new methodolgy (find them below). See page 4 of the first document for the pending BICRA scores.

S&P Preliminary BICRA in 23 Countries Jan 6 2011 (1)

S&P FI RfC Methodology for Determining BICRA May 13 2010 (1)


Anonymous said...

Welcome back in 2011.

This article from Deflationite is sobering:

Australia: Defying the Precipice

Basically if China slows, Australia will experience considerable pain, high unemployment on the back of the collapse of the housing bubble. If.

Torchwood1979 said...

Excellent link Anonymous, that article sums up the problem we have with credit driven house price growth. The following paragraphs makes the point quite clearly:

"This is probably my favourite graph because it very simply shows the transformation of the Australian economy in the last twenty years. In 1990 we were an economy prepared to use over 60% of the credit available to finance business in infrastructure, invention and innovation and allocate just over 20% of our credit to enable the people to purchase and invest in housing. Now in 2010 we only like to allocate just over 30% of our credit to help innovation, instead we much prefer to allocate our available credit, nearly 60% of it now to the pursuit of buying and investing in houses.

We have basically completely switched our focus from business to housing.

Credit is a precious thing and should be used on activities that can bring long term benefits to the citizens that use it, on real investment in new enterprises that create new markets and new products that allow the economy to expand and for that credit to be paid back.

Instead we now spend most of our credit buying and selling houses. The trouble is, these markets and products are all dependant on one thing, that the price of houses keeps growing. If prices fall the whole edifice supporting the buying and selling is under threat along with the only way the credit can be paid back.

The next large unemployment episode in Australia will be unique as it will not be associated with a fall in the growth of business credit, it will be instead associated with the fall of housing credit and the fall of house prices."

David Llewellyn-Smith said...

It is worse still when compared with the US and UK, a point I made last year:

Torchwood1979 said...

Ah, I remember that post clearly. I was reading it on my break and started a conversation with my boss who was thoroughly offended by the suggestion that pouring that much money into housing was unproductive for the economy as a whole and potentially risky for individuals gearing too highly. I think I inadvertantly struck a nerve.

Bank Lending Criteria said...

It's an 'happy new year' all around this morning. Except, apparently, from Standard and Poors who, according to Banking Day are about to downgrade our financial system.