No relief on rising credit costs

THE global credit crunch, which has helped drive up home mortgage rates in Australia, looks set to continue after an improvement in credit market conditions in May proved to be a false dawn.

Credit strategists say the market will remain volatile and the cost of credit high, as the soaring price of oil, the threat of inflation and higher interest rates and fears of more bank losses make lending money riskier, The Australian reports.

Last week, St George again lifted its variable mortgage rate, citing increased funding costs as the reason

Analysts say other banks will probably follow suit as the continuing crunch makes them increasingly unwilling to shoulder the burden.

ABN AMRO head of debt capital markets Peter Block said that after the price of credit hit a peak in March, conditions began to improve and optimism grew that the crunch, sparked by the collapse in US sub-prime mortgages a year ago, was easing.

But since mid-May, costs and volatility have been rising, although they have yet to retest the March peak. In that month, five-year subordinated notes issued by the Commonwealth Bank to fund its operations were priced at 245 basis points over the benchmark London interbank offered rate (Libor).

By mid-May, those notes could be issued at 75 points over Libor but the price of that debt has now blown out to 143 points, as buyers demand a higher yield spread to compensate them for a perceived increase in risk. Yields on 90-day bank bills have experienced similar volatility.

Mr Block said renewed fears about the health of banks in the US and Europe, rising oil prices and a growing clamour by central banks on inflation had sapped market liquidity and widened spreads. He said new debt issuance in Europe had "dried up".

The northern hemisphere summer would place further pressure on liquidity as many participants took a break. "Global markets are pretty challenging at the moment," Mr Block said.

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Published on July 7-th, 2008 in Home Loans
Damon Rasheed is the CEO of Rate Detective, an Australian financial service comparison sites specialising in Life Insurance, Income Protection Insurance and home loans. Damon holds a Master's Degree in Economics from the University of Melbourne and has been involved in many start-up internet businesses.
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