Circuit Breaker?

Over the fold is a brief I received via email from the Senior Economist, Macquarie Bank. A new turn of events in regard to the RBA’s domestic lending activities, and a sound indicator that alert bells, while not stridently ringing yet, are starting to tinkle. Recession is still not out of Australia’s future.

RBA alters its Domestic Market dealing arrangements
The RBA today announced that it would amend its domestic market dealing arrangements to accept a greater range of securities as collateral for its domestic repurchase agreements.
Currently the RBA will accept Commonwealth Government securities, securities issued by State and Territory borrowing authorities, securities issued by certain supra-national and foreign government agencies and bills and CDs issued by some Australian banks.
The RBA’s statement declares that:
“From Monday, 17 September, the list of eligible securities for repos will be expanded to include:

• bills and certificates of deposit issued domestically by any authorised deposit-taking institution (ADI) which holds an Exchange Settlement (ES) Account at the Reserve Bank. The remaining term to maturity of these securities, as at present, must be no more than 12 months; and
• Australian dollar bonds issued by an ADI which holds an ES Account and is rated A3 or above by all major credit ratings agencies that rate it, and in any event, by at least two such agencies. Subordinated and structured securities will be excluded.

“From Monday, 8 October, the list of eligible securities will be further expanded to include:

• Australian dollar residential mortgage-backed securities (RMBS) backed by prime, domestic, full-doc residential mortgages and rated AAA or equivalent; and
• Australian dollar asset-backed commercial paper (ABCP) backed by prime, domestic, full-doc residential mortgages (either directly or in securitised form) and rated P-1 or equivalent.”

The action of the RBA is a recognition of the ongoing problems in money and credit markets both in Australia and overseas. By indicating a willingness to accept securities such as mortgage-backed securities, the RBA is hoping to re-instill confidence in those markets and encourage financial markets to also view them more favourably. The RBA’s actions are also a timely reminder that they are monitoring the evolution of the credit squeeze very closely.
Also released overnight, was news that the OECD has pared back its US growth forecast in reaction to the credit squeeze. While warning that further downgrades are possible, the OECD’s actions are potentially a good guide to what we can expect other policymakers and market participants to undertake in the next few months. Interestingly, for a number of countries, the recent good news about growth had outweighed the negative impact of the credit squeeze.
OECD growth forecasts (2007)

	New	Previous
US	1.9%	2.1%
Japan	2.4%	2.4%
EU	2.6%	2.7%
UK	3.1%	2.7%
Canada	2.7%	2.5%

Financial market implications
The RBA’s actions are a potential circuit breaker that could help ease the squeeze in credit markets and restore confidence in money markets. Of course, only time will tell whether these actions are sufficient, but at the very least they indicate that central banks are not going to sit on the sidelines and let these problems snowball. On balance, this should be supportive for growth and equity markets, while limits the potential need for the RBA to cut interest rates. The combination of those factors suggest it should also support the A$.

Could be a saving grace for RAMS, et al.