Ironically, RBA governor Philip Lowe unwittingly put him in his place, retorting that “our communities and our financial markets are both having trouble dealing with a rapidly unfolding situation that they have not seen before”.
The only precedent for the current pandemic is the Spanish Flu, which emerged over 100 years ago, when globally integrated and digitised markets did not exist.
In a March 7 analysis for the RBA and government, I wrote that “if ever there was a case for governments to provide a liquidity/economic ‘bridge’ between the current crisis and solutions in the near future in the form of effective anti-viral drugs, which look promising, and vaccines, it is right now.
“This is not about bailing out bad businesses that have made mistakes, it is about keeping the global economy afloat as it tries to deal with the equivalent of a financial asteroid strike.”
While the central bankers took a few torturous weeks to come up to speed with the fact that all markets were breaking down, they have slowly, and iteratively, stepped up to the plate to defend the liquidity of the financial system and ensure borrowing costs for households and businesses remain low.
As recently as this week, Grenville scoffed at my thesis that there was an emerging illiquidity and solvency crisis. “You talk about ‘a global liquidity crisis across both equity and bond markets’”, he wrote. “But equities and most bonds are still readily marketable. Government bonds are in such strong demand that yields are historically low.”
(I was, in fact, talking about the liquidity of government bonds and bank funding costs, and had expressly advised the RBA not to buy corporate bonds.)
On Thursday, governor Lowe stated that the RBA was being forced to intervene in the government bond market to “support its smooth functioning” because “liquidity conditions are highly stressed”. One major bank characterised it as “totally broken”.
The chair of the US Federal Reserve likewise confirmed that the US government bond market, supposedly the most liquid and risk-free of them all, had “shown signs of stress and impaired liquidity”. “When stresses arise in the Treasury market, they can reverberate through the entire financial system and the economy,” he warned.
In response to Grenville’s remarks, one European trader snapped “show me a bid in German [government] bunds, because every time I try to sell liquidity disappears”.
As I forecast in my column last week in The Australian Financial Review, Team Australia delivered precisely the optimal policy package for combating the coronavirus crisis.
This multifaceted platform includes cutting the RBA’s target cash rate to its effective lower bound at 0.25 per cent to encourage banks to drop borrowing rates, which they have done. CBA quickly slashed its small business borrowing rate by 100 basis points and reduced fixed-rate home loans to just 2.29 per cent.
The RBA will also commence purchases of government bonds to maintain a three year yield of only 0.25 per cent, which will reduce the cost of longer-term, fixed-rate (as opposed to floating rate) business and household loans that price off this benchmark.
Another landmark initiative is the RBA offering all Australian banks at least $90 billion of three-year funding at an ultra-cheap cost of just 0.25 per cent. This terrific idea draws a line in the sand on bank funding costs, which Lowe repeatedly stressed on Thursday was a key priority to keep business and mortgage borrowing rates down.
In parallel, Treasurer Josh Frydenberg has instructed the Australian Office of Financial Management (AOFM) to invest $15 billion into pools of securitised home loans, small business loans, and personal loans known as residential mortgage-backed securities (RMBS) and asset-backed securities (ABS).
Like the RBA, the AOFM will make this capital available at normalised pre-crisis costs to banks and non-banks that rely on RMBS and ABS to fund themselves, which is essential for maintaining competition across the financial system.
It is also a very profitable trade for taxpayers, because the government’s 0.25 per cent cost of borrowing three-year money is miles below the circa 1.5 per cent to 2.0 per cent the AOFM will earn. (I designed a similar $15 billion RMBS program for the government in 2008, and the current $2 billion ABS investment program Scott Morrison established to support small business lending outside the big banks.)
The RBA is also offering banks low-cost funding over shorter tenors of 1 month, 3 months, 6 months or 12 months via its existing repurchase arrangement facilities, which it used in a similar fashion during the GFC.
APRA jumps in
Concurrently, APRA announced that banks can temporarily drop below their “unquestionably strong” capital ratios, and lever up their balance-sheets, to enhance their ability to offer the community cheap loans. APRA will also likely allow the banks to avoid raising expensive hybrid and subordinated bond funding for a period while capital markets are dislocated and funding costs are at record highs.
Finally, on Friday morning the banks announced, with the blessing of APRA, that they will waive for six months all loan repayments of small businesses impacted by the shock, which Frydenberg describes as a “game-changer”.
Over the weekend, the government will release its upgraded fiscal response, which will likely involve huge cash injections for workers, the unemployed and employers to create an income, funding, and liquidity bridge between now and when the crisis passes.
This is a huge win for “Team Australia” and a defining moment in the careers of its members. I can personally attest that the Prime Minister, Scott Morrison, has been project managing every inch of Australia’s assertive response.
This should also be the making, not breaking, of his talented Treasurer, Josh Frydenberg, who has been leveraging his expansive personal network to draw in numerous outside experts. They have been brilliantly supported by the regulatory agencies. Stakeholders have, for example, raved about the performance of APRA’s boss, Wayne Byres, who is one of the world’s best banking supervisors.
And RBA governor Phil Lowe and his deputy governor, Guy Debelle, deserve praise for their outstanding agility in rapidly delivering a comprehensive policy package to help the nation defeat what Lowe regards as its greatest challenge since the Great Depression.
Markets were eager to corner Lowe on Thursday on what the RBA will and will not do. In contrast to the muddling efforts of his peers at the Fed and the ECB, who have repeatedly disappointed markets over recent weeks, Lowe made no such mistake.
Time and time again, the governor declared that “every option is on the table”. Australia’s central bank would do “whatever it takes” to maintain ample liquidity and keep borrowing costs exceptionally low. Markets might have to learn the hard way that you don’t fight the RBA.
A final shout-out goes to the public and private advisers working in the background to help policymakers arrive at the right decisions. These include CBA’s increasingly impressive leader Matt Comyn, ANZ boss Shayne Elliott, Treasury Secretary Steven Kennedy, who has been outstanding, Frydenberg’s advisers Adam Clarke and Martin Codina, former UBS impresario Matt Grounds, shadow Treasurer Jim Chalmers and RBA board director Mark Barnaba.