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Wednesday, July 30, 2008

Things are getting worse - unless you're in the business of mining

Australian business confidence has fallen to recession levels and bank shares have fallen further as the International Monetary Fund has warned that of elevated global financial risks.

The latest IMF Global Financial Stability Report released yesterday describes worldwide financial markets as “fragile” and says that credit quality across many classes of loans has begun to deteriorated...

The report came as the giant US investment bank Merrill Lynch announced plans to unload its mortgage-backed securities at fire sale prices, selling securities it bought for $US30 billion for under $US7 billion.

On Friday the National Australia Bank wrote down the value of its $1.2 billion of mortgage-backed securities by 90 per cent. On Monday the ANZ increased its provision for bad loans by $375 million.

Both share prices plunged further yesterday, the NAB falling a further 4 per cent and the ANZ a further 1.8 per cent. The Commonwealth Bank fell 4.3 per cent.

The National Australia Bank has lost 8 per cent of its value in the last week; the ANZ 12 per cent.

The latest NAB quarterly survey finds businesses throughout the country gloomy with confidence down to levels not seen since the 1991 recession.

The bank said the medium term viability of firms was under question as slowing demand and rising interest rate and oil costs ate into profitability. The profitability index fell a further 6 points over the June quarter to just above the zero line.

“The Reserve Bank will take this as a sign that the rate hikes are working,” said Commonwealth Securities economist Savanth Sebastian.

“Any further tightening of interest rates would need careful consideration. The signs are that the economy is slowing and the housing market is unable to attract strong investor interest.”

The All Ordinaries share market index lost 15 per cent of its value in the year to June and has lost a further 6 per cent since then. The typical Australian balanced superannuation fund lost 6.4 per cent of its value during the financial year and has probably lost another 3.5 per cent since then.

The head of investment markets research at Colonial First State Hans Kunnen said investors were asking whether the slump was likely to be protracted like the early-mid 1970s or shorter and sharper like the early 1990.

“Many of them long-term investors and superannuation-type folk who are prepared to hang in there, but for a lot of the smaller investors I think fear has overcome them and if you look at the market it seems to be pricing in recession,” he told ABC radio.

The Treasurer Wayne Swan said that while Australia was not immune from global developments, it was “better placed than most countries to withstand the current turmoil.”

“The IMF’s assessment is that risks to the stability of the global financial system remain elevated, particularly given increasing concerns over the global economic outlook,” he said.

“While most of the expected losses on US sub-prime mortgage exposures now appear to have been taken, funding costs for global financial institutions have risen and structured credit markets remain effectively shut.”

“Our banking sector is taking prudent steps by putting in place provisions to cover off the potential impact of the difficult global financial conditions and poor investment decisions of the past.”

The NAB survey found that business conditions deteriorated in most sectors except for mining. Businesses had wound back their hiring plans for the next 12 months.