''Dislocation'' is the buzzword. The Government's blanket guarantee of bank deposits is sparking an investor exodus out of funds and products which are not covered by the guarantee. It's going into the banks.
This is dislocation at the retail level. At the wholesale level, the dilemma for Treasury is even more perplexing.
Effectively, the Commonwealth is putting its balance sheet on the line, and, potentially, its credit rating at risk by guaranteeing the wholesale funding requirements of the banking sector in their entirety. We are talking hundreds of billions of dollars.
If for instance, a foreign bank is contemplating rolling $5 billion worth of Aussie bank debt it would be odds-on to demand the security of a AAA-rated government guarantee, especially in the present climate.
The question is; what exactly will be guaranteed? Any funding? Will there be exemptions? What will the fee be?
We put the questions to the Treasurer's office last week and the response was pure dead-bat. No comment, no background. When will the details emerge? ''Quickly''. Is ''quickly'' days or weeks? No comment.
It's all a bit of a rush job - seemingly brought on by the need to prop up one or two tottering banks either with high-risk loan books or derivatives exposures, or both.
Now the governor of the Reserve Bank, Glenn Stevens, has been outed for advising Treasury to cap the proposal - with a pitch for a $5 million depositor ceiling according to one report - in view of the likely rush of money into the banks and the consequent ... dislocation.
Maybe the Rudd proposal will turn out to be a clever strategy to ensure that the banks have enough liquidity to survive the repayment of their short term positions in the coming months (if they have to). The more cash the banks have, the greater the pull they will have with foreign investors in contending the money is safe and secure.
Rudd may have already worked out the end game here. He may be looking to ensure that the banks (the biggest home mortgage owners) survive longer without Government cash injections (though perhaps sacrificing the pension funds in the process) so that home owners hang onto their homes longer, thereby circumventing a mortgage meltdown.
The guarantee package was slapped together with such haste that it's easy to draw the conclusion that Stevens and the RBA had not delivered their tacit approval.
Swift action
Two weeks ago the mantra was ''our economy is strong''. Last week it was ''tough times ahead''.
''The global financial crisis has entered into a new, dangerous and damaging phase, one which goes to the real economy, growth and jobs. That's why the government has decided to act decisively and early,'' the PM told reporters.
Kaboom! $10 billion stimulus package.
Again, two weeks ago - in the wake of a 100 point rate cut from the Reserve - Australia's banks were the best in the world, with the best balance sheets in the world. Last week, they still were, but ''extraordinary times require extraordinary actions''.
Kapow! A $700 billion blanket guarantee on deposits - hang on, better underwrite wholesale funding for the big boys too.
The boffins in Treasury will surely be throwing cartwheels to come up with a package which minimizes the political damage while appeasing the high-finance sector and other interested parties.
It is not out of the picture that Rudd may yet resile from his unlimited guarantee. When Ireland became first mover to guarantee deposits earlier this month it brought a flood of money into the country and the ire of the whole European community with it.
Although the idea of flooding our banks with depositor money sounds good, it can have lasting deleterious effects on the economy. The rub is that the money has to leave sometime, and this is precisely the problem with Australia's bank-funded current account deficit.
There is little data about on the parties who owe and who are owed the billions in money we have borrowed from offshore and now the $A has tanked it is reasonable to assume that borrowers - does this money include super funds? - are under water on currency as they need to pay back the money at some point.
True, much of it may be hedged but how much is moot.
Challenger in a fix
To the dislocation at the retail level and there is something of a panic today - it's all over commercial radio - over non-bank investments, mortgage funds in particular.
Directors of financial services group Challenger - 20% owned by James Packer - are bunkered in a meeting now to decide whether to freeze redemptions on other Challenger funds.
Last week, Challenger locked up redemptions on its high-yield fund. Today, it is expected they will announce a redemption freeze on flagship mortgage fund, Challenger Howard, which is also the country's biggest mortgage fund with $2.9 billion under management.
Much of the business is in annuities, which should be safe but a crisis of confidence has little logic, just fear. Investors can draw some comfort from the fact that annuities are regulated by APRA.
Meanwhile, a modest thaw in credit markets offshore last night brought some comfort to equity markets. A 4% rally on Wall Street - alongside a welcome narrowing in interbank lending spreads - has been greeted by a further relief rally today in the local bourse.
Collateral damage
Yet the severity of the credit crisis and the necessary but ad hoc responses by government are now throwing up unintended consequences such as a run on mortgage fund products.
The way these things work is investors buy into the fund and the fund on-lends the proceeds to property developers and property investors. While these funds enjoy strong yields in the good times they are often exposed to a mismatch on the funding front as, for instance, an investor time horizon of say three years may be out of sync with the completion and return on a property project.
The well-publicised case of Gold Coast operator, City Pacific, has already seen $1 billion worth of investor funds frozen and other Gold Coast operators are hitting the skids.
The Government cannot be blamed for the wealth destruction going on on ''The Coast'' however as most of these operators are high risk and their property deals and financings incestuous. Further, the writing was on the wall before this year's ructions on world markets.
For those funds with more security via an exposure to rents on real property as opposed to development the risk is underlying tenants and financiers going bust.
That is happening a lot. The Government however is not in a position to underpin all investment products. In fact, its guarantee on the banks alone is worth $700 billion, a lump of money it simply could not find unless it went to the bond market, and went into deficit.
As for Challenger, it has some $14.9 billion of investor savings in its funds management division and some 80,000 investors.
Former chief executive Mike Tilley presided over $700 million in capital raisings for the group before he departed, rather fortuitously, at the end of August. That helps, though once redemption freezes begin they do lasting damage.
It was reported elsewhere that UK group Arkmile, which made a takeover play for Challenger Infrastructure Fund earlier this year, has sold its 64 million shares in CIF to Deutsche Bank - which would to be something of a parking exercise.
mwest@fairfax.com.au
BusinessDay
