AUSTRALIA ANNOUNCES PLAN TO SUPPORT COMMERCIAL

C O N F I D E N T I A L CANBERRA 000095 NOFORN SIPDIS E.O. 12958: DECL: 01/27/2019 TAGS: EFIN AS SUBJECT: AUSTRALIA ANNOUNCES PLAN TO SUPPORT COMMERCIAL PROPERTY PROJECTS REF: A. 08 CANBERRA 1036 ¶B. CANBERRA 79 Classified By: ECON COUNS E KAGAN, REASONS 1.4 B, D ¶1. (C) Summary: The GOA has announced a new plan to provide liquidity to commercial property projects, to prevent job losses and support Australian banks. The Government's prompt action to support lending to the commercial property sector - with a focus on projects under construction - highlights its concern about supporting construction activity as well as the danger to Australia's banks of a downturn in commercial real estate. Credit is still growing, albeit more slowly than before. The pull-out of GMAC and GE has had less of an effect than originally feared. End summary. ¶2. (U) On Saturday January 24 Prime Minister Kevin Rudd and Treasurer Wayne Swan announced it would establish a new A$4 billion (US$2.6b) "Australian Business Investment Partnership" vehicle (dubbed "Rudd Bank" by commentators) that would provide liquidity to support viable major commercial property projects. In their announcement, they played up the jobs angle; the media statement said that absent action, weak demand and tight credit could cause up to 50,000 in the commercial property sector to lose their jobs (out of 150,000),with spillover effects elsewhere in the economy. One reason cited for concern was the role of foreign banks in debt syndicates that finance such projects; the GOA said that the global financial crisis meant that some foreign banks may consider withdrawing funding from Australian projects. ¶3. (C) Econoff met with Australian Treasury officials January 27 to follow-up on this announcement and discuss the general health of the banking sector, from Treasury's perspective. Kerstin Wijeyewardene, manager of Treasury's Systemic Issues Unit (and acting General Manager of the Financial System Division),noted "lots" of troubling signs in international banking, particularly in the United States and the UK. Concerning Australia, Wijeyewardene said Australian financial institutions weren't immune, but have not been hit hard by the consequences of the global financial crisis. She said that in general, Australian banks have been more prudent (with the regulatory presence of the Australian Prudential Regulatory Authority (APRA) a part of that). Australian banks were holding foreign toxic assets, and she said have generally already written them down; she is not aware that there is "more to come". Australian banks continue to raise capital, and have been using the GOA guarantee (ref A) "extensively." They are raising money in the US, and are looking at issuances in Japan as well. Credit for households and businesses is still growing (through November, according to preliminary figures),albeit more slowly than before due to drops both in supply of and demand for credit. ¶4. (C/NF) Other contacts are less sanguine. Goldman Sachs/JBWere Chief Economist Tim Toohey has told us repeatedly that commercial property exposure is the Achilles heel for Australian banks and that any significant downturn in commercial property will likely lead to significant losses. He argued that previous recessions have all featured Qlosses. He argued that previous recessions have all featured steep falls in commercial property values and that Australia is likely to experience something similar in the coming year. Bank of America Managing Director Tom Pascarella told us that while the Government has focused on the shortfall in foreign lending, Australian banks are likely to find it harder to roll over their own loans as they manage their balance sheets in a much more cautious time. He said that foreign lenders are still interested in Australia but that banks everywhere are being much more careful, which means that a deal that might have received A$100 million two or three years ago will probably only get A$70-80 million now. ¶5. (C) Godwin Grech of the Corporations and Financial Services Division discussed the new "Rudd Bank" special purpose vehicle. Grech noted that large commercial property developments are normally financed by a syndicate headed by one of Australia's four large banks. The big bank usually recruits smaller Australian banks and foreign banks to participate, in order to prevent being too exposed to one large project. Some A$76 billion (US$50b) in such loans are due in the next 12 months. Some A$30-40 billion of that money, Grech said, was from foreign banks, and even if only 10-15% of that money were not renewed, it would be difficult to replace. In addition, the big banks are already at the limit for exposure to Australia's commercial property sector, so they would be unable to loan more to make up the shortfall. Grech said the GOA saw two choices: let events play out, probably causing drops in commercial property values of up to 30%, and then "sort it out" by recapitalizing the banks. Or, try to put a floor on commercial property by "selectively" financing the more "strategic" projects (not further defined). ABIP will be funded with A$2 billion from the GOA and A$500 million each from the big four banks; it will also be able to issue and raise government debt up to A$30 billion, taking advantage of Australia,s AAA rating. Grech said just announcing the project itself was important for sending a positive message that the GOA is aware of these issues and is taking steps to protect jobs (and banks). ¶6. (C) Grech also discussed the drying up of auto credit. GMAC and GE both announced the end of their operations in Australia in late 2008, due to their parent corporations pulling capital back home due to problems in the American market. In response, the GOA announced on December 5, 2008 a A$2 billion special purpose vehicle to provide wholesale floorplan financing for viable car dealers financed by GMAC or GE. In practice, Grech said, because of the "responsible" way that GMAC and GE are wrapping up their operations in Australia, and strong responses by St George,s Bank and ANZ Bank (and Toyota finance, which has recruited dealers formerly working with GMAC and GE),this vehicle hasn't had to be tapped. It will only hit A$1 billion if no deal can be made for Ford's A$500 million book. Grech said he expected this program, because of the higher risk, would end up costing the GOA money, probably in the second half of 2009. ¶7. (SBU) On short sells, Treasury said the extension of the ban by the Australian Securities and Investments Commission (ASIC) until March 6 (ref B) was purely due to bad timing, and the volatility following the announcements of the Royal Bank of Scotland,s problems. The expectation is the ban will, barring unforeseen events, be lifted after the current breather period has ended. ¶8. (C/NF) Comment: This program puts the GOA in the position of having to risk picking winners or just giving money to banks for deals they are already committed to. Details have not been made public (and probably haven't been finished) about how funds would be disbursed or how projects would be selected, beyond the media statement saying ABIP will provide financing for "commercially sound" property. It has been criticized by opposition leader Malcolm Turnbull and others for promising GOA money to banks and rich developers, with the excuse of saving jobs for electricians, carpenters, and plumbers. Like others in Australia, Treasury officials point to the dual regulatory roles of APRA and ASIC in having helped prevent Australian banks from falling foul of some of the practices that helped provoke the global financial crisis. Australian banks remain sound, and four of the 11 banks currently enjoying the top credit rating globally are Australian. But this move, like previous ones such as the ban on short-sells, shows the GOA is concerned about the potential impact of the global financial crisis on Australia's banks, and clearly prefers to respond quickly to global developments to prevent Australia's mid-sized market from appearing vulnerable. CLUNE