Australian Funds Block Withdrawals

The Age BusinessDay is reporting Four fund providers suspend withdrawals as redemptions soar

AUSTRALIA'S mortgage fund industry has dramatically succumbed to a flight of money to government-guaranteed bank deposits, with four of the biggest five fund providers suspending withdrawals.

AXA Asia Pacific, Australian Unity and Perpetual Investment Management last night suspended redemptions on a string of mortgage-backed investment funds, in an unprecedented series of announcements. They followed a similar move on the Challenger Howard Mortgage Fund — the country's biggest — earlier this week.

The latest three come after what has been described as a dramatic spike in redemptions from mortgage funds after the Government moved to guarantee bank deposits almost two weeks ago. But the rate of redemptions rapidly gained pace in the past 48 hours, after the Challenger move and as the scope and nature of the guarantee was hotly debated by the Government and Opposition in Canberra.

Four of the five biggest mortgage fund providers in the country — all save ING — have now suspended withdrawals from their funds, worth a collective $10 billion, according to research house Lonsec.

Unintended Consequences Of Bank Deposit Guarantees

Here is an interesting effect of selective government guarantees as noted in Funds block withdrawals.

THE mortgage fund lockout widened yesterday as two of the country's biggest fund managers blocked investor access to $4 billion. Perpetual and AXA said last night they would defer redemptions on $2 billion tied up in blue-ribbon mortgage funds.

Their decisions follow a rash of unintended consequences from the Federal Government announcement on October 12 that it would guarantee bank deposits.

Foreign investment banks that had been denied the guarantee lost deposits as money managers shifted funds to banks with government backing.

Backflip On Guarantee

In response to the withdrawals, Australia backflipped on an unlimited guarantee. Here is a view of a guarantee backflip.

THE deposit guarantees have put competition back 20 years in two weeks. Even with last night's Government backflip on an unlimited guarantee, whose details were not out at time of publication, the damage is done.

AMP, the biggest insurance and funds group in the country, has just been hit, suspending withdrawals on its Capital Enhanced Yield Fund for 12 months. The Mariner group suspended redemptions too yesterday.

For the funds industry the guarantees are a disaster, especially for those well-managed institutions that matched their funding profiles conservatively and held plenty of cash. They are paying a penalty for good management.

Over the past two decades, in the wake of deregulation, a plethora of non-bank lenders sprouted up in competition to the banks, from Aussie Home Loans to GE Money. They are now either out of the game on pricing, or gone.

GE, the biggest non-bank financier in the country, pulled the pin on house and car loans yesterday. There will be dislocation in the car industry where showroom floors are packed with new cars on finance from GE.

The deluge of money out of institutions into the banks is a disaster. Funds — both mortgage and high-yield funds — are freezing redemptions and locking down investor savings by the day. It's a fluid situation but the figures now surpass 32 funds with $20 billion, and counting, in investor savings affecting about 100,000 people.

Australia's Key Stock Index Falls to 4-Year Low

Bloomberg is reporting Australia's Key Stock Index Falls to 4-Year Low; Boral Tumbles

Australian stocks fell, dragging the index to the lowest in almost four years, as signs of weaker earnings fueled concern that the economy is slowing.

Boral Ltd., the nation's biggest seller of building materials, sank 8.9 percent, the most in seven years, after saying earnings may fall. Sims Group Ltd., the world's largest recycler of scrap metal, fell 5.9 percent after saying it may cut profit margins and sales volumes. Westpac Banking Corp. lost 3.8 percent, pacing declines among financial shares, as money- market rates rose.

The S&P/ASX 200 Index fell 105 points, or 2.6 percent, to 3,869.40 at the close in Sydney, its lowest since Nov. 23, 2004. The gauge has lost 2.6 percent this week, taking its drop this month to 16 percent.

Macquarie Office Trust, Australia's largest publicly traded office property trust, plunged 34 percent to 36.5 Australian cents, the biggest loser in the S&P/ASX 200 Index. ING Industrial Fund, a real estate investment trust, sank 10 percent to 63 Australian cents, rounding a three-day, 43 percent slump.

The unintended consequences of all these global bailout plans continue to mount. What a disaster.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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