Australia Not at Risk of U.S.-Style Subprime Crisis

By Jacob Greber

March 26 (Bloomberg) -- Australia’s lowest benchmark interest rate in four decades and government grants to first- time home buyers are unlikely to cause a U.S.-style subprime crisis, an official at Australia’s central bank said.

“The past year and a half has seen lending standards tighten in Australia, with a significant shrinkage in the amount of lo-doc and non-conforming lending,” Anthony Richards, head of economic analysis at the Reserve Bank, said in Sydney today. He didn’t address monetary policy.

Concerns have been raised that four percentage points of interest-rate reductions since September and government grants of as much as A$21,000 ($14,700) to first-home buyers could lead to an expansion of lending to riskier borrowers, Richards said. First-time buyers accounted for a record 26.5 percent of dwellings that were financed in January, up from 18.1 percent a year earlier, a report on March 11 showed.

“No doubt some of the loans being written now will turn sour,” Richards told the Fourth Annual Housing Congress today. “However, overall, I suspect that the risk of non-performing loans increasing to the extent seen in the U.S. is low.”

Still, potential buyers “need to carefully consider their own circumstances, including whether they would be able to continue to service their loans if mortgage rates were at some point to begin to return to more normal levels,” he added.

The Australian dollar traded at 69.86 U.S. cents at 9:15 a.m. in Sydney from 69.86 cents just before the speech was released. The two-year government bond yield was unchanged at 3.07 percent. A basis point is 0.01 percentage point.

Mortgage Payments

Reserve Bank of Australia Governor Glenn Stevens lowered the benchmark interest rate to 3.25 percent in February to help stoke an economy that unexpectedly shrank in the fourth quarter for the first time in eight years. Since September, commercial banks have reduced the rate on variable home loans by 375 basis points.

The rate reductions have saved borrowers with an average A$250,000 home loan about A$600 a month. Around 90 percent of property buyers in Australia have variable-rate mortgages.

“It is clear that monetary policy has been effective in lowering borrowing rates in the Australian economy,” Richards said.

By contrast, central banks in other countries have also cut their policy rates by at least as much as the Reserve Bank, but have typically seen much smaller reductions in the actual rates paid by households and businesses, Richards added.

Debt Burden

“The fall in borrowing rates has reduced the debt- servicing burden of the household sector by approximately 5 percent of household disposable income,” he said. “That implies a significant amount of cash flow relief, for spending on other goods and services or to save and/or pay down debt.”

Policy makers left the benchmark rate unchanged this month for the first time in six meetings, saying recent cuts are supporting the economy.

While property prices fell around 3 percent last year, most of the declines were in more expensive suburbs, which have “fallen noticeably,” Richards said. “This presumably reflects the greater exposure of people in higher-priced suburbs to financial developments.”

Richards added that auction clearance rates for Sydney and Melbourne this year have shown “a significant pickup relative to late 2008.”

Government Handouts

Government grants to first-time buyers, the central bank’s rate cuts and lower prices have led to a “significant improvement” in housing affordability for people paying mortgages or contemplating a purchase, he said.

Home-building approvals unexpectedly fell in January for a seventh month, adding to signs the economy is in its first recession since 1991. Gross domestic product shrank 0.5 percent in the fourth quarter from the previous three months.

While “home-building is likely to remain weak in the near term, there are a number of factors which should support activity over the medium term, providing stimulus to the broader economy,” Richards said.

Richards said there may be a need for about 40,000 new dwellings a year to keep rental vacancy rates at “normal levels of around 3 percent,” compared with the current rate of 1.5 percent.

“Whatever the true shortfall of dwellings, we can say with some confidence that our housing market is relatively tight,” he said. That will “‘support homebuilding in the period ahead.”

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

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BOJ’s Tankan Survey May Tumble to 30-Year Low on Export Crash

By Jason Clenfield

March 26 (Bloomberg) -- Japan’s export collapse may push sentiment among the nation’s largest manufacturers to the lowest level in more than 30 years in March, triggering more investment cuts and job losses.

An index that measures confidence among large makers of cars and electronics will slide to minus 55 from minus 24 in December, economists predict the Bank of Japan’s Tankan survey will show on April 1. That would be the lowest since 1975 and the biggest drop since the bank started the survey. A negative number means pessimists outnumber optimists.

Toyota Motor Corp. and Sharp Corp. are expecting their first losses in decades this fiscal year as overseas sales plummet. Exports plunged an unprecedented 49.4 percent last month and the World Trade Organization forecasts that global commerce will shrink the most in the postwar era.

“Companies will make every effort to avoid going into the red two fiscal years in a row,” said Takehiro Sato, chief Japan economist at Morgan Stanley in Tokyo. “Many will unveil major restructuring plans.”

The country’s largest firms plan to cut investment by 12 percent in the year starting April 1, which would be the biggest pullback since at least 1983, economists predict the survey will show. Business spending accounts for 15 percent of the economy and cuts could aggravate a recession that’s already shaping up to be Japan’s worst since World War II.

Gross domestic product shrank an annualized 12.1 percent last quarter, the biggest contraction among the advanced economies and the country’s sharpest decline since the 1974 oil crisis. Bank of Japan Governor Masaaki Shirakawa said last month that conditions will remain “severe” next quarter.

Slash Production

Export declines have set new records each month since November as U.S. and European consumers retrenched. The collapse in U.S. sales forced Toyota to cut thousands of jobs and slash domestic production by half this quarter. The automaker may not raise output until after September, the Asahi newspaper reported this week, citing an executive at a parts supplier.

Manufacturers have gotten some relief from the yen’s 7.1 percent depreciation versus the dollar this year. The currency shot up 23 percent in 2008, adding to the woes of companies already reeling from the plunge in overseas sales. Honda Motor Co. says every one-yen gain against the dollar cuts its operating profit by 18 billion yen ($190 million).

The recession has so far been slow to take its toll on domestic consumers and the service companies that rely on them. Private consumption fell 0.4 percent last quarter from the previous three months, compared with an unprecedented 13.8 percent decline in exports.

Non-Manufacturing

Economists predict sentiment at the country’s large non- manufacturers will fall to minus 26 in the March survey from minus 9 previously. While that result would be the worst since the central bank started tracking the data in 1983, it’s only half as bad as the reading for manufacturing confidence.

“The decline in demand is coming from abroad -- not from within Japan,” said Naomi Fink, Japan strategist at Bank of Tokyo-Mitsubishi UFJ Ltd. in Tokyo. Unlike in the U.S., where millions of jobs have been lost and households are in debt, Japanese consumers are not in a crisis, she said.

While profit at Japanese manufacturers fell by 94.3 percent last quarter, earnings at service companies dropped 35 percent and some firms are seeing profits rise. Oriental Land Co., operator of Tokyo Disneyland, forecasts a 30.6 percent jump in profit this fiscal year. Sales at Fast Retailing Co., Japan’s biggest clothing store, rose 4.2 percent in February.

Downturn Deepened

Record declines in exports and factoryproduction haven’t triggered job losses of the scale seen in the U.S., where the unemployment rate jumped to 8.1 percent last month. Japan’s jobless rate has risen only 0.3 percentage point to 4.1 percent since the downturn deepened in October.

Still, a prolonged slump in overseas markets could exacerbate job losses in coming months and chip away at consumer spending, economists said. The World Trade Organization this week forecast that global trade will drop 9 percent this year, the worst in the postwar era.

“Private consumption has provided some ballast to this economy,” said Randall Jones, head of the Japan desk at the Organization for Economic Cooperation and Development in Paris. “That’s probably going to weaken in quarters ahead.”

To contact the reporter on this story: Jason Clenfield in Tokyo at jclenfield@bloomberg.net

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New Zealand Current Account Deficit Widens to Record

By Tracy Withers

March 26 (Bloomberg) -- New Zealand’s current account deficit widened to a record in the year through December as the global recession reduced tourism and as costs for shipping goods overseas increased.

The shortfall expanded to NZ$16.07 billion ($9 billion) in the 12 months ended Dec. 31 from a revised NZ$15.53 billion in the year through September, Statistics New Zealand said in Wellington today.

Finance Minister Bill English said this week the deficit is “uncomfortably large” and makes New Zealand vulnerable to international market turmoil amid its dependence on foreign funding. Standard & Poor’s said on Jan. 13 that it may cut the nation’s AA+ foreign-currency credit rating if the current account gap and rising overseas debt begin to curtail economic growth and investment.

“We expect the deficit to keep international investors and rating agencies nervous,” Craig Ebert, senior markets economist at Bank of New Zealand Ltd. in Wellington, said before the report was released.

A deficit represents money New Zealand has to borrow overseas to pay for the goods and services it imports, and to finance investment not covered by local savings. Any drop in foreign funding would threaten the value of the local dollar and bonds.

New Zealand’s dollar bought 56.60 U.S. cents at 10:52 a.m. in Wellington from 56.58 cents before the report was released. The local currency has fallen more than 30 percent against the U.S. dollar in the past year, the worst performer of 16 most- traded currencies tracked by Bloomberg.

Global Comparisons

The annual current account deficit widened to 8.9 percent of gross domestic product from 8.6 percent in the year ended Sept. 30. That compares with the median estimate of a 9 percent gap in a Bloomberg News survey of seven economists. The deficit reached 9.3 percent of GDP in early 2006

By comparison, Australia’s current account gap was 4.3 percent of GDP at Dec. 31. The U.S. posted a fourth-quarter shortfall of 4.7 percent of GDP.

New Zealand’s current-account deficit, the broadest measure of trade because it includes tourism and investment income, may narrow this year as the domestic recession reduces imports of consumer goods and business equipment, said Ebert.

“Moderation is likely to be the trend this year and next, albeit to less discomforting proportions rather than anything to feel particularly comfortable about,” Ebert said. The gap may be NZ$14 billion by December 2009, he added.

New Zealand Recession

The nation’s economy probably shrank 1.1 percent in the three months ended Dec. 31 from the previous quarter, the biggest contraction in almost 18 years, according to a Bloomberg News survey of nine economists. The GDP report is due for release at 10:45 a.m. in Wellington tomorrow.

Economists prefer to watch a rolling annual current-account balance for New Zealand because of volatility in the quarterly readings.

In the three months ended Dec. 31, the current account deficit narrowed to NZ$4.03 billion from NZ$6.01 billion in the third quarter. It widened from NZ$3.48 billion in the same period a year earlier. Economists forecast a NZ$4 billion quarterly gap.

The nation’s services deficit more than doubled, making the largest contribution to the wider annual current account gap, today’s report showed. The trade deficit also increased while the investment income shortfall narrowed.

The services deficit widened to NZ$1.01 billion from NZ$496 million in the 12 months ended September. Higher sea freight charges made the biggest contribution and tourist arrivals declined.

Trade Deficit

The goods and services trade deficit widened to NZ$2.36 billion in the 12 months to December from NZ$2.26 billion in the year through September. Fourth-quarter imports rose 11 percent from a year earlier, led by the increased cost of crude oil. Exports increased 10 percent.

The annual deficit on investment income, which makes up most of the current account, narrowed to NZ$13.58 billion from NZ$13.67 billion in the year ended Sept. 30.

Foreign investors earned less from their local subsidiaries and their holdings of stocks and bonds. Income earned by New Zealanders investing offshore also declined.

New Zealand’s net liabilities increased to NZ$167.7 billion, or 92.9 percent of GDP at Dec. 31, from NZ$165.23 billion, or 92 percent at Sept. 30, today’s report showed.

To contact the reporter on this story: Tracy Withers in Wellington at twithers@bloomberg.net.

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Oil Steady After Falling on Report That Showed Supplies Climbed

By Mark Shenk and Samantha Zee

March 26 (Bloomberg) -- Crude oil was little changed after falling yesterday on a government report that showed U.S. inventories climbed to the highest since 1993 because of deteriorating demand.

Supplies rose 3.3 million barrels to 356.6 million last week, the Energy Department said yesterday. Inventories were forecast to increase by 1.1 million barrels, according to a Bloomberg News survey. Stockpiles of gasoline and distillate fuel, a category that includes heating oil and diesel, dropped as refineries cut operating rates.

“There’s more crude than we need,” said Chip Hodge, a managing director at MFC Global Investment Management in Boston, who oversees a $9 billion natural-resource-company bond portfolio. “Until demand starts to move higher I don’t see this market moving higher.”

Crude oil for May delivery rose 8 cents, or 0.2 percent, to trade at $52.85 a barrel at 9:37 a.m. Sydney time on the New York Mercantile Exchange. May futures fell $1.21, or 2.2 percent, to settle at $52.77 a barrel yesterday. Prices are up 19 percent this year.

The inventory gain was the 22nd in 26 weeks. The increase left supplies 13 percent higher than the five-year average for the period, the department said.

Imports of crude oil increased 204,000 barrels a day to 9.38 million in the week ended March 20, the highest level in six weeks, the report showed.

Stockpiles at Cushing, Oklahoma, where New York-traded West Texas Intermediate crude is delivered, fell 2.21 million barrels to 31.7 million last week. Supplies in the week ended Feb. 6 were the highest since at least April 2004, when the Energy Department began keeping records for the location.

Surging Inventories

“It’s hard to get bullish about crude oil with inventories at the highest since 1993,” said Tom Bentz, a senior energy analyst at BNP Paribas Commodity Futures Inc. in New York. “The only thing that’s positive for crude prices is the fall in supplies at Cushing.”

Consumption of fuels rose 2.2 percent to 19.2 million barrels a day last week. Total daily fuel demand averaged over the past four weeks was 19.1 million barrels, down 3.2 percent from a year earlier.

Refineries operated at 82 percent of capacity, down 0.1 percentage point from the prior week, the Energy Department said.

“There was a slight improvement in demand last week, but refiners obviously aren’t too excited because of the cut in” operations, said Mike Zarembski, senior commodity analyst at OptionsXpress Holdings Inc. in Chicago. “The biggest risk is that the economy will improve and they will be too slow to increase production.”

Fuel Supplies

Gasoline stockpiles dropped 1.14 million barrels to 214.6 million last week. The decline left inventories 0.4 percent lower than the five-year average for the week, the department said. A 650,000-barrel drop was forecast, according to the median of 14 analyst responses in a Bloomberg News survey.

Distillate supplies declined 1.58 million barrels to 143.9 million, leaving stockpiles 25 percent above the five-year average for the period. A 100,000-barrel drop was forecast.

The Organization of Petroleum Exporting Countries agreed to hold output targets steady at its meeting in Vienna on March 15 on concern higher prices may harm an ailing global economy. Ministers pledged to tighten compliance with record cutbacks agreed on last year to bolster prices.

Cut a Lot

“Inventories are high, but OPEC has cut a lot of oil,” said Adam Sieminski, the chief energy economist at Deutsche Bank AG in Washington. “In January and February, they have cut 2.7 million barrels. That should be enough over the next few months to make some progress on inventories as long as the economy doesn’t get any worse.”

Total SA, Europe’s third-largest oil company, is shutting output at its Port Arthur, Texas, refinery in response to weakening demand. The company said in a filing with the Texas Department of Environmental Quality March 24 that it began closing units at the facility.

“The U.S. market has deteriorated a lot and we are adjusting to this,” Total spokesman Michael Crochet-Vourey said by telephone in Paris yesterday.

Production at the facility, which has the capacity to process 240,000 barrels of oil a day, will be stopped for weeks, United Steelworkers union members who work at the plant said.

To contact the reporter on this story: Mark Shenk in New York at mshenk1@bloomberg.net; Samantha Zee in Los Angeles at szee@bloomberg.net.

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