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SA banks not immune from money market madness

Kevin Davie

Moody's has cut the rating of South Africa and the banking sector by a notch. This means the government's infrastructure ambitions have to be trimmed.

If you had predicted a few years back—say before the 2008 meltdown that European banks would ­at some point in the future borrow €1-trillion from the European Central Bank ... well, no one would have predicted that, would they?

Even a few months back, European banks were said to be reluctant to get funding from their central bank because of the perceived stigma of having to access official money.

But this week the central bank announced that a second tranche of about €500-billion had been accessed by 800 banks in terms of its three-year long-term refinan-cing operation programme, in which banks get loans at near-zero interest rates in exchange for putting up collateral with the bank.

The programme has not solved the eurozone debt problems, but it has dramatically reduced the prospect of a financial meltdown. The loans—topping €1-trillion—are reportedly used by the banks to shore up their capital positions or to buy high­yielding government bonds.

Some of the funds have made their way to South Africa as part of this chase for yield, putting upward pressure on the rand, which was trading below R7.50 to the dollar at mid-week.

Central banks are so active in the United States, Europe and China and have created so much money to prop up their countries’ ailing banks—that they could be thought of as a bubble all of their own.

The central banks of the United States, Japan, China, Europe and England have created a combined $10-trillion in new money in the past four years, says columnist Bernard Hickey in The New Zealand Herald, arguing that it is time for the country’s central bank to fire up the printing presses to help fund, inter alia, the reconstruction of earthquake-ravaged Christchurch.

“Even a couple of years ago, this would have been unthinkable to say, even treasonous,” says Hickey. “I’m sure many readers will still believe such money printing is dangerous madness, guaranteed to debase the currency, create hyperinflation and empower politicians to go on an even bigger spending spree.

“But we’ve been here before and right now our major trading partners are doing exactly this. We should at least be talking about it.”

Wall Street money manager Barry Ritholtz calculates the combined size of the balance sheets of the largest eight central banks at $15-trillion—33% of the combined world market capitalisation at $48-trillion.

The smart money sees little short-term threat to inflation in this money creation jamboree. But observers agree that it is not clear at all how central banks will deleverage these positions once their surrogates are able to stand on their own feet again.

It would be nice to think that South Africa’s banks are immune from this market madness, but they are not.

Ratings agency Moody’s reckons that the government’s ambitious infrastructure programme may put undue pressure on the fiscus, particularly if public sector workers do not agree on wage restraint and if government is unable to deliver on savings. It worries that new funding demands will put greater pressure on our banks, which could have to turn to the state for backing it may not be able to provide.

Moody’s has cut the rating of the both the country and the banking sector by a notch. This raises borrowing costs, meaning government’s infrastructure ambitions will have to be trimmed.

Finance Minister Pravin Gordhan said at a pre-budget briefing “we’ll find the money”. He was looking for efficiencies to drive the spending.

But whatever you think of Moody’s and its diagnosis, it has just made it that much more costly for Gordhan to achieve his big-build goals.


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