This step is designed to help alleviate frictions observed in money markets in recent weeks, both globally and domestically, as a result of the economic shock caused by the outbreak says the Bank of England.
The CTRF is a flexible liquidity insurance tool that allows participants to borrow central bank reserves (cash) in exchange for other, less liquid assets (collateral).
The Bank’s liquidity insurance facilities support financial market functioning by providing market participants with predictable and reliable sources of liquidity. The Bank’s liquidity insurance facilities support financial stability by reducing the cost of disruption to critical financial services.
Holding additional CTRF operations over the next two weeks complements the Bank’s existing liquidity facilities. The CTRF will run alongside the Bank’s regular sterling market operations – the Indexed Long-Term Repo (CTRF) and Discount Window Facility (DWF). The Bank is also able to lend in all major currencies through its participation in the central bank swapline network.
The CTRF will lend reserves for a period of three months. This will also allow participants to use the CTRF as a way to bridge beyond the point at which drawings can be made from the Term Funding Scheme with additional incentives for SMEs (TFSME) – helping to support lending to the real economy as quickly as possible.
An accompanying Market Notice provides additional detail and the terms of this operation
The New Zealand Government, retail banks and the Reserve Bank are today announcing a major financial support package for home owners and businesses affected by the economic impacts of COVID-19.
The package will include a six month principal and interest
payment holiday for mortgage holders and SME customers whose incomes have been
affected by the economic disruption from COVID-19.
The Government and the banks will implement a $6.25 billion
Business Finance Guarantee Scheme for small and medium-sized businesses, to
protect jobs and support the economy through this unprecedented time.
“We are acting quickly to get these schemes in place to
cushion the impact on New Zealanders and businesses from this global pandemic,”
Finance Minister Grant Robertson said.
“These actions between the Government, banks and the Reserve
Bank show how we are all uniting against COVID-19. We will get through this if
we all continue to work together.
“A six-month mortgage holiday for people whose incomes have
been affected by COVID-19 will mean people won’t lose their homes as a result
of the economic disruption caused by this virus,” Grant Robertson said.
The specific details of this initiative are being finalised
and agreed urgently and banks will make these public in the coming days.
The Reserve Bank has agreed to help banks put this in place
with appropriate capital rules. In addition, it has decided to reduce banks
‘core funding ratios’ from 75 percent to 50 percent, further helping banks to
make credit available.
We are announcing this now to give people and businesses the
certainty that we are doing what we can to cushion the blow of COVID-19.
The Business Finance Guarantee Scheme will provide
short-term credit to cushion the financial distress on solvent small and
medium-sized firms affected by the COVID-19 crisis.
This scheme leverages the Crown’s financial strength,
allowing banks to lend to ease the financial stress on solvent firms affected
by the COVID-19 pandemic.
The scheme will include a limit of $500,000 per loan and
will apply to firms with a turnover of between $250,000 and $80 million per
annum. The loans will be for a maximum of three years and expected to be
provided by the banks at competitive, transparent rates.
The Government will carry 80% of the credit risk, with the
other 20% to be carried by the banks.
Reserve Bank Governor Adrian Orr, said: “Banks remain well
capitalised and liquid. They also remain highly connected to New Zealand’s
business sector and almost every household in New Zealand. Their ability to
extend credit to firms to bridge the difficult times created by COVID-19 is
critical and made more possible with today’s announcements. We will monitor
banks’ behaviour over coming months to assess the effectiveness of the
risk-sharing scheme.”
The Government, Reserve Bank and the Treasury continue to
work on further tailor-made support for larger, more complex businesses, Grant
Robertson said.
And so it starts. The latest musings from Australian’s army of economists are beginning to wake up to the grim reality. Reality is not friendly. And the news will likely get worse ahead.
First, Westpac says that the unemployment rate is set to reach 11% by June. The economy is now expected to contract by 3.5% in the June quarter. And a sustained recovery is not expected until Q4.
Just last week they forecast a peak in the unemployment rate of 7%. Since then we got more extensive shutdowns than originally envisaged. Economic disruptions are set to be larger as the government moves to address the enormous health challenge which the nation now faces.
They says that historically, recessions have tended to emanate from investment cycles, particularly those centred on property and building with the initial shock centred on construction. As this recession will hit services much harder, the loss in jobs will be much quicker, but so too can the rebound be much faster, all dependent on how many firms remain solvent.
In usual recessions it is often uncertain whether the economy is in recovery phase whereas the signals around government policy (particularly shutdowns) will be much clearer and households and business will respond.
Their latest forecasts are based on an assessment of the expected impact of the Package on jobs and growth.The two stimulus packages cost a total of $25.8bn in 2019/20 and $36.3bn in 2020/2021.Of that total of $62bn, $22.85bn is allocated to direct payments to the unemployed and social security beneficiaries while $31.9bn is set aside for small business to retain workers.
However small business only receive cash if they retain workers. The subsidy (keeping cash which is withheld from workers for PAYE tax) is only, say, 20–30% of the direct cost of the worker. Given the current hugely challenging outlook for business, the Package will be measured in terms of its success in keeping people in work.
And AMP’s Shane Oliver says:
Auction
clearance rates and sales momentum are showing some signs of slowing
this month. This may reflect an increasing desire on the part of buyers
and sellers to put property transactions on hold to avoid being exposed
to the virus unnecessarily. Social distancing policies will only
intensify this. On its own this may crash transactions but may just
flatten price gains.
However, it’s the likely recession that we
have now entered due to coronavirus related shutdowns that imposes the
big risk. We expect at least two negative quarters of GDP growth in the
March and June quarters with the risk that the September quarter is also
negative. And the contraction could be deep because big chunks of the
economy will be largely shut – tourism, travel, and entertainment with a
severe flow on to parts of retailing. The toilet paper, sanitiser and
canned/frozen food boom may help supermarkets for a while – but as
Deutsche Bank recently calculated for every $1 spent on such items there
is $15 spent on things that are vulnerable to social distancing.
Past large share market falls have seen a
mixed impact on property prices. The 1987 50% share market crash
actually boosted home prices as investors switched from shares to
property. But the key is what happens to unemployment as this often
forces sales and crimps demand. Back in 1987 the economy remained strong
and unemployment fell but the recessions of the early 1980s and early
1990s saw falls in average national capital city home prices of 8.7% and
6.2% respectively as unemployment rose. The GFC share market fall of
55% also saw a 7.6% home price fall, even though it wasn’t a recession,
because unemployment rose from 4% to nearly 6%.
If the recession turns out to be long – pushing unemployment to say 10% or more – then this risks tripping up the underlying vulnerability of the Australian housing market flowing from high household debt levels and high house prices. The surge in prices relative to incomes (and rents) over the last two decades has gone hand in hand with a surge in household debt relative to income that has taken Australia from the low end of OECD countries to the high end.
So he says “we have always concluded that the combination of high prices and debt on their own won’t trigger a major crash in prices unless there are much higher interest rates or a recession. Unfortunately, we are now facing down the barrel of the latter. A sharp rise in unemployment to say 10% or beyond risks resulting in a spike in debt servicing problems, forced sales and sharply falling prices. This could then feedback to weaken the broader economy as falling home prices lead to less spending and a further rise in unemployment and more defaults and so on. This scenario could see prices fall 20% or so”.
Bear in mind though that part of this
would just be a reversal of the 9% bounce in average capital city prices
seen since mid-last year.
It’s also not our base case but it highlights why governments and the RBA really have to work hard to avoid letting the virus cause a lot of company failures, surging unemployment and household defaults.
And Goldman Sachs is still relatively sanguine.
Goldman
Sachs said it was now forecasting a 6 per cent contraction in the
domestic economy in 2020 — the biggest since the 1920s Great Depression —
with unemployment peaking at 8.5 per cent.
On the upside, the strength of Australian
bank balance sheets in terms of funding, liquidity and capital left them
“significantly less vulnerable than compared to any point in the recent
past”.
“Similarly, the source of historic loan
losses for banks — corporate balance sheets — enter this downturn in a
better condition than at any point in the last 40 years, with close to
all-time-low levels of gearing and all-time low debt-servicing ratios,”
Goldman said.
But given the scale of the forecast
contraction, bad debts were now expected to rise significantly to 50bps
of loans and slash bank earnings by 20 per cent.
A hard-landing scenario would wipe out between 50-70 per cent of the sector’s earnings.
Supermarket operators will be able to coordinate immediately to ensure consumers have reliable and fair access to groceries during the COVID-19 pandemic following the ACCC’s granting of interim authorisation.
The interim authorisation will allow
supermarkets to coordinate with each other when working with
manufacturers, suppliers, and transport and logistics providers.
The purpose of this is to ensure the
supply and the fair and equitable distribution of fresh food, groceries,
and other household items to Australian consumers, including those who
are vulnerable or live in rural and remote areas.
The authorisation allows a range of
coordinated activities but does not allow supermarkets to agree on
retail prices for products.
“Australia’s supermarkets have experienced
unprecedented demand for groceries in recent weeks, both in store and
online, which has led to shortages of some products and disruption to
delivery services,” ACCC Chair Rod Sims said.
“This is essentially due to unnecessary
panic buying, and the logistics challenge this presents, rather than an
underlying supply problem.”
“We recognise and appreciate that
individual supermarket chains have already taken a number of important
steps to mitigate the many issues caused by panic buying. We believe
allowing these businesses to work together to discuss further solutions
is appropriate and necessary at this time,” Mr Sims said.
The ACCC granted interim authorisation on Monday afternoon after receiving the application last Friday.
“We have worked very swiftly to consider
this interim authorisation application, because of the urgency of the
situation, and its impact on Australian consumers,” Mr Sims said.
The Department of Home Affairs has
convened a Supermarket Taskforce, which meets regularly to resolve
issues impacting supermarkets. Representatives from government
departments, supermarkets, the grocery supply chain and the ACCC are on
the Taskforce. The interim authorisation applies to agreements made as a
result of Taskforce recommendations.
This authorisation applies to Coles,
Woolworths, Aldi and Metcash. It will also apply to any other grocery
retailer wishing to participate. Grocery retailers, suppliers,
manufacturers and transport groups can choose to opt out of any
arrangements.
The ACCC will now seek feedback on the application. Details on how to make a submission are available on the ACCC’s public register along with a Statement of Reasons.
International Monetary Fund Managing Director Kristalina Georgieva made the following statement today following a conference call of G20 Finance Ministers and Central Bank Governors:
“The human costs of the Coronavirus pandemic are already
immeasurable and all countries need to work together to protect people and
limit the economic damage. This is a moment for solidarity—which was a major
theme of the meeting today of the G20 Finance Ministers and Central Bank
Governors.
“I emphasized three points in particular:
“First, the outlook for global growth: for 2020 it is negative—a recession at least as bad as during the global financial crisis or worse. But we expect recovery in 2021. To get there, it is paramount to prioritize containment and strengthen health systems—everywhere. The economic impact is and will be severe, but the faster the virus stops, the quicker and stronger the recovery will be.
“We strongly support the extraordinary fiscal actions many
countries have already taken to boost health systems and protect affected
workers and firms. We welcome the moves of major central banks to ease monetary
policy. These bold efforts are not only in the interest of each country, but of
the global economy as a whole. Even more will be needed, especially on the
fiscal front.
“Second, advanced economies are generally in a better
position to respond to the crisis, but many emerging markets and low-income
countries face significant challenges. They are badly affected by outward
capital flows, and domestic activity will be severely impacted as countries
respond to the epidemic. Investors have already removed US$83 billion from
emerging markets since the beginning of the crisis, the largest capital outflow
ever recorded. We are particularly concerned about low-income countries in debt
distress—an issue on which we are working closely with the World Bank.
“Third, what can we, the IMF, do to support our members?
We are concentrating bilateral and multilateral surveillance on this crisis and policy actions to temper its impact.
We will massively step up emergency finance—nearly 80 countries are requesting our help—and we are working closely with the other international financial institutions to provide a strong coordinated response.
We are replenishing the Catastrophe Containment and Relief Trust to help the poorest countries. We welcome the pledges already made and call on others to join.
We stand ready to deploy all our US$1 trillion lending capacity.
And we are looking at other available options. Several low- and middle-income countries have asked the IMF to make an SDR allocation, as we did during the Global Financial Crisis, and we are exploring this option with our membership.
Major central banks have initiated bilateral swap lines with emerging market countries. As a global liquidity crunch takes hold, we need members to provide additional swap lines. Again, we will be exploring with our Executive Board and membership a possible proposal that would help facilitate a broader network of swap lines, including through an IMF-swap type facility.
“These are extraordinary circumstances. Many countries are
already taking unprecedented measures. We at the IMF, working with all our
member countries, will do the same. Let us stand together through this
emergency to support all people across the world.”
The Federal Reserve is committed to using its full range of tools to support households, businesses, and the U.S. economy overall in this challenging time. The coronavirus pandemic is causing tremendous hardship across the United States and around the world. Our nation’s first priority is to care for those afflicted and to limit the further spread of the virus. While great uncertainty remains, it has become clear that our economy will face severe disruptions. Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.
The Federal Reserve’s role is guided by
its mandate from Congress to promote maximum employment and stable
prices, along with its responsibilities to promote the stability of the
financial system. In support of these goals, the Federal Reserve is
using its full range of authorities to provide powerful support for the
flow of credit to American families and businesses. These actions
include:
Support for critical market functioning.
The Federal Open Market Committee (FOMC) will purchase Treasury
securities and agency mortgage-backed securities in the amounts needed
to support smooth market functioning and effective transmission of
monetary policy to broader financial conditions and the economy. The
FOMC had previously announced it would purchase at least $500 billion of
Treasury securities and at least $200 billion of mortgage-backed
securities. In addition, the FOMC will include purchases of agency commercial mortgage-backed securities in its agency mortgage-backed security purchases.
Supporting the flow of credit to
employers, consumers, and businesses by establishing new programs that,
taken together, will provide up to $300 billion in new financing. The
Department of the Treasury, using the Exchange Stabilization Fund (ESF),
will provide $30 billion in equity to these facilities.
Establishment of two facilities to
support credit to large employers – the Primary Market Corporate Credit
Facility (PMCCF) for new bond and loan issuance and the Secondary Market
Corporate Credit Facility (SMCCF) to provide liquidity for outstanding
corporate bonds.
Establishment of a third facility, the
Term Asset-Backed Securities Loan Facility (TALF), to support the flow
of credit to consumers and businesses. The TALF will enable the issuance
of asset-backed securities (ABS) backed by student loans, auto loans,
credit card loans, loans guaranteed by the Small Business Administration
(SBA), and certain other assets.
Facilitating the flow of credit to
municipalities by expanding the Money Market Mutual Fund Liquidity
Facility (MMLF) to include a wider range of securities, including
municipal variable rate demand notes (VRDNs) and bank certificates of
deposit.
Facilitating the flow of credit to
municipalities by expanding the Commercial Paper Funding Facility (CPFF)
to include high-quality, tax-exempt commercial paper as eligible
securities. In addition, the pricing of the facility has been reduced.
In addition to the steps above, the
Federal Reserve expects to announce soon the establishment of a Main
Street Business Lending Program to support lending to eligible
small-and-medium sized businesses, complementing efforts by the SBA.
The PMCCF will allow companies access to
credit so that they are better able to maintain business operations and
capacity during the period of dislocations related to the pandemic. This
facility is open to investment grade companies and will provide bridge
financing of four years. Borrowers may elect to defer interest and
principal payments during the first six months of the loan, extendable
at the Federal Reserve’s discretion, in order to have additional cash on
hand that can be used to pay employees and suppliers. The Federal
Reserve will finance a special purpose vehicle (SPV) to make loans from
the PMCCF to companies. The Treasury, using the ESF, will make an equity
investment in the SPV.
The SMCCF will purchase in the secondary
market corporate bonds issued by investment grade U.S. companies and
U.S.-listed exchange-traded funds whose investment objective is to
provide broad exposure to the market for U.S. investment grade corporate
bonds. Treasury, using the ESF, will make an equity investment in the
SPV established by the Federal Reserve for this facility.
Under the TALF, the Federal Reserve will
lend on a non-recourse basis to holders of certain AAA-rated ABS backed
by newly and recently originated consumer and small business loans. The
Federal Reserve will lend an amount equal to the market value of the ABS
less a haircut and will be secured at all times by the ABS. Treasury,
using the ESF, will also make an equity investment in the SPV
established by the Federal Reserve for this facility. The TALF, PMCCF
and SMCCF are established by the Federal Reserve under the authority of
Section 13(3) of the Federal Reserve Act, with approval of the Treasury
Secretary.
These actions augment the measures taken
by the Federal Reserve over the past week to support the flow of credit
to households and businesses. These include:
The establishment of the CPFF, the MMLF, and the Primary Dealer Credit Facility;
The expansion of central bank liquidity swap lines;
Steps to enhance the availability and ease terms for borrowing at the discount window;
The elimination of reserve requirements;
Guidance encouraging banks to be
flexible with customers experiencing financial challenges related to the
coronavirus and to utilize their liquidity and capital buffers in doing
so;
Statements encouraging the use of daylight credit at the Federal Reserve.
Taken together, these actions will provide
support to a wide range of markets and institutions, thereby supporting
the flow of credit in the economy.
The Federal Reserve will continue to use
its full range of tools to support the flow of credit to households and
businesses and thereby promote its maximum employment and price
stability goals.
Last week we posted an important show where I discussed the underlying issues relating to debt. We have now posted the transcript to the show which is available on line or by download.
Last week NAB announced they were to withdraw a capital issue due to market conditions. Today they announced the conversion of 7,500,00 NAB Capital Notes which were issued on 23 March 2015, and issued 35,140,972 fully paid ordinary shares in connection with the conversion at a price of $21.342608.
The original securities were paying 3.5% plus bank bill rate less the tax rate, so would be quite expensive relative to other funding mechanisms. They are also due for conversion no later than 23 March 2022, but had an optional conversion on 23 March 2020, which NAB exercised.
I see some claiming this is a sign of distress, I disagree, it is a convenient and effective method of enhancing capital, ahead of pressures ahead. Yes, it is a conversion, but tagging it a “bail-in” is in my view inaccurate. The share price of the conversion was higher than the market price.
That said, in a falling market NAB shares were down around 10%.
