Unstable markets continue to crimp bond issuance

Last week was the fourth straight week of no issuance in the Australian corporate bond market, as the ructions in global financial markets continued. The focus last week, after a holiday Monday in Europe, was on the seemingly inconsequential move by the Bank of Spain to take control over what was effectively a small regional building society, CajaSur, which accounted for just 0.6 per cent of Spanish banking assets.

This was followed the next day by news that four other such 'building societies' are to merge. These entities are mutually owned banks that boosted their lending fivefold during Spain's 10-year housing boom by lending for mortgages and to property developers. Now they are described as being close to bankruptcy.

The markets fear the contagion that could spread from these 'Cajas' to Spain's major banks. But this hasn't stopped Spain's two largest banks, Banco Santander and Banco Bilbao Vizcaya Argentaria from competing with each other, and NAB, to buy the branch network being sold by Royal Bank of Scotland in the UK.

Of more concern should have been the damning comments made on the Spanish economy by the IMF. The IMF said Spain faces severe challenges, with a dysfunctional labour market; deflating property bubble; a large fiscal deficit; heavy private sector and external indebtedness; anaemic productivity growth; weak competitiveness; and a banking sector with pockets of weakness. Did they miss anything?

Clearly it was enough for Fitch Ratings, which lowered its rating on the country to 'AA+' from 'AAA', on Friday. Standard & Poor's has rated Spain 'AA' with a negative outlook since late April but Moody's Investors Service still has the country at 'Aaa/Stable'.

Added to this we had further examples of European disunity and of Germany's determination to act unilaterally.

European Commission President, Jose Manuel Barosso, described Germany's aim to modify provisions of the EU Treaty, governing member states' budgets, as naïve. He went on to say it would also be naïve to think that one can reform the treaty only in the areas that Germany considers important.

Meanwhile, Germany announced that it will extend its unilateral ban on naked short selling, implemented the week before, to cover all stocks that have their primary listing in Germany. The legislation will be passed in September. The EC said it will issue its own proposals for restricting naked short selling in the next few weeks, with a view to having legislation in force by January 2013!

Then, of course there is the determination of the new UK government to introduce a banking levy - its own version of a Tobin tax (and it will not be told by the EU what it can do with the proceeds) - and narrow banking, by splitting investment banking activities from retail banking.

With all this going on, it was not surprising that equity and debt investors were interested only in selling, for most of the week.