Stocks Rise As Banks Find Room To Move Amid Falling Interest Rates

The Age

Friday October 31, 2008

By JACOB SAULWICK

STOCKS rallied for a second day running, even as more details emerge of the impact of the credit crunch on the wider Australian economy.

The market opened about 1.5% higher and climbed throughout the day. By the end of trade, the S&P/ASX 200 had risen 4%, while in Japan and Hong Kong the benchmark indexes gained about 10%.

Large one-day rises are a feature of nervous markets. Many of the biggest one-off spikes occurred during the Great Depression.

The US Federal Reserve did its best to hearten investors on Wednesday, cutting interest rates by an expected half percentage point. The cut took the Fed's key lending rate to 1%, a record low last reached in 2004.

A tentative return of confidence to equity markets is also paving the way for a slight easing of stress in credit conditions, with banks enjoying some relief in funding costs.

"Credit has improved a little bit in the last couple of days, and I think it will continue to be determined by what's going on in equity markets," said a senior analyst at nabCapital, Ken Hanton.

In Australia, a picture is emerging of the impact of the credit crisis on the ability of households and businesses to borrow money.

Suncorp, for instance, this week outlined to mortgage brokers a frugal new approach to lending to low-doc borrowers, those with minimum documentation.

From November 1, the Queensland bank will only allow low-doc customers from the five major banks and a few other selected lenders to refinance with it.

Suncorp, which pinned the decision on a desire to avoid exposure to riskier loans, also slashed its maximum loan amount for low-doc customers from $3 million to $1.5 million.

Low-doc borrowers are typically self-employed without the history of paid employment required for a normal loan.

A Sydney financial adviser, Roger Ward, said the shift in lending would make life difficult for self-employed borrowers with loans from lenders such as Macquarie Bank and Virgin Money.

"This would be a major problem if other lenders followed suit and locked out thousands of borrowers from refinancing to lower interest rates," Mr Ward said.

In Australia, foreign banks have been sharpest to pull back their lending, according to analysis by ABN Amro economists.

Growth in loans outstanding to households and companies has slowed to 12% from a 50% annual rate, suggesting foreign banks are increasingly reluctant to extend credit due to the strain on their parent company's balance sheet.

ABN Amro economist Kieran Davies said the impact of lower foreign bank lending in Australia was likely to exacerbate tight financial conditions.

© 2008 The Age

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