Had lunch today with a banker, talking economics and the role of central banks.
Long forgotten much of my economics, from years ago, when and I was an assiduous student.
All things Keynes, my professors all talking Samuelson.
Times have changed, but not the principles underlying economic rationalism.
We talked about the central bank and the raising of bonds.
Mainly about the Australian situation, where the government is facing an energy crisis and has commanded gas producers, to supply the domestic market, given last summer’s frequent electricity “brown outs,” indeed closing the state of South Australia completely.
Alternative solar energy had failed, when “unseasonal winds,” knocked down major electricity pylons.
Gas could be an alternative energy source; Australia has the world’s largest gas reserves in the world.
Government demands/orders were to supply domestic markets first.
It creates a problem.
All the gas, is tied up in contracts, mainly with foreign countries.
Besides, various states prevent drilling for new gas supplies.
The gas producers are unhappy to break long-term international contracts; costly to cancel, presumably to be borne by the government.
Fine if agreed, but no pipelines running from parts of Australia where much of the gas exists, so the product needs to be liquefied and carried on ships to the main population areas in New South Wales and Victoria.
But hang on, LPG carriers to say nothing of the loading facilities, are all owned by the fuel company.
The government will have pay for the ships too!
To operate in Australia, the fuel companies got Australian bank guarantees.
So the long-term purchasers of gas, are unhappy, so now are the banks who borrowed money for set up costs, for extraction of the gas, as part of loans to the fuel company!
Few are happy, fuel companies, banks, consumers – no instant fix on energy costs
And this is where loans and bond issues, come in to play, be that in Australia ... or in Bahrain!
For investors to find bonds attractive, the central bank in the country, usually is the guarantor for honouring such bonds.
Sovereign guarantee, usually enough.
So back come the old eagle eyes of IMF and credit rating agencies, like Moody’s and Standard and Poors.
The first thing they look at is the state of the debt in each country, and when it is high level, with lower credit ratings, they need a second guarantor to ensure that the bond will be honoured.
And we are talking billions here, of course, 3bn to be precise.
Good news the other day, that “Treasury bills” had been oversubscribed by 132 per cent.
Good but for Treasury Bills, the guarantor is generally the government.
The bond issue for investors is for 3bn, so no doubt “due diligence” by investors and credit rating agencies, to see if the loan bonds can be repaid, so here, government debt will be an issue.
Perhaps the need for a guarantor, guarantor.
In the past that was “no problem”
Now?
wpeppinck@hotmail.com