Australia already has an absurd cost of living. So it was no surprise to us when American research firm Concur calculated the world’s most expensive places for an international business traveller was an Australian city.
Brisbane topped the list, then Tokyo, then Sydney and Perth, with Melbourne in seventh. To be clear, Australia’s capital cities are the world’s most expensive places to do business.
Of course, part of the results were due to our high dollar, and that’s even taking into account the recent drop. Further falls should make things cheaper for foreigners, but even more expensive for us.
For now, unless you’re an exporter, you’re going to feel the cost of living crunch as the Australian dollar drops.
But all this is nothing compared to the crunch going on in the Australian shadow banking sector.
We’ve already documented Australia’s version of the sub-prime crisis. And you might have heard about China’s dangerous Wealth Management Products and how they’re supporting China’s property boom into new and unoccupied heights. Our college, Greg Canavan has been forecasting the demise of China’s property and finance sector for months.
Well here in Australia, the collapse of the very same sector has been underway for years. Instead of Wealth Management Products, the story focuses on Unlisted Unrated Debentures (UUDs). If you haven’t heard of them, or think they’re insignificant, just ask yourself whether you heard about American sub-prime mortgages or thought they were insignificant in 2006.
The collapse in Australia’s shadow banking sector is happening in slow motion, mostly delayed by Australia’s epic bureaucratic and legal shenanigans. But it’s happening nonetheless…
Unlisted Unrated Debenture providers Banksia, Gippsland Secured Investments, Australian Secured Investments Limited, Wickham Securities, FinCorp, Westpoint, the Cherry Fund, Cymbis Finance, and many more have all failed.
We Googled the names on ASICs list of debenture providers, and got more ‘in liquidation’ and ‘administrator appointed’ in the results than not. Angas Securities could be next, with S&P downgrading the firm’s credit rating and ASIC requesting it stops issuing new debentures.
UUDs were a favourite amongst retirees because they were often marketed as ‘bank like’ investments offering a slightly higher return than term deposits. But they don’t have a government guarantee, as people are learning the hard way.
All this reeks of the beginning of the American subprime mess. Peripheral finance companies going bankrupt because of dodgy mortgages while the banks sit pretty, claiming their bad loans are at perfectly normal levels.
But why did the UUD’s get left with all the dodgy mortgages? We reckon it’s because of the LAF scandal we wrote about last year. Bankers and mortgage brokers just inflate people’s incomes and assets on loan paperwork to make sure their loans are approved. A sub-prime loan becomes a prime loan on paper. The shadow banking industry buys the ‘prime’ loans and packages them into investments for you and me to lose money on when the mortgages turn out to be dodgy.
If you factored in all the defaults in the UUD loans, what would the state of the Australian housing and finance industry really be?
For a hint, you could look at New Zealand. Seven years into its own debentures debacle, $3 billion is missing from 200,000 deposit holder’s accounts. The taxpayer was on the hook for another $1 billion.
Here in Australia, debentures make up a whopping 7% of total deposits and debt securities. In other words, a crisis in the debenture markets, if it’s recognised as such, could cause real problems for the banking sector, not just the shadow banking sector.
Unfortunately for investors in the Aussie UUD market, there hasn’t been a government bailout…for now. Of course, the real question is whether this virus comes out of the shadows and into the real banking sector.
Nick Hubble+
Editor, The Money for Life Letter
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