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Sitting here in Café Sydney, on the
balcony of the old Customs House building overlooking the harbour
bridge, it's hard to imagine that anything as frantic and
high-powered as international finance is happening in the streets
just behind. It isn't. At the so-called four pillars - Westpac,
National Australia Bank, Commonwealth Bank of Australia and ANZ -
and at most of the investment banks and brokers the food may be
international but business is basically domestic.
This is the place where the words "foreign bank" don't mean
foreign staff, foreign clients, cross-border flows and superior
know-how. They mean a local operation completely foreign to a
distant owner. Inside these institutions ex-pats stand out like the
bagpiper in front of the opera house. So distant are these outposts
that, for example, when Deutsche Bank bought Bankers Trust it
forgot not only about BT's extensive and very successful operations
downunder, but also about its own top-ranked subsidiary with which
BT overlapped. Sydney is littered with bankers for whom the whole
affair is still too painful to talk about before six o'clock.
Despite some successes in attracting back-office facilities
to the country, Australia remains a large, extremely sophisticated
but isolated market. The minister for financial development Joe
Hockey will have to wait a few more years before his dream of
Sydney - he has to be careful about saying "Sydney" but that's what
he means - as a truly regional financial centre are realized. The
Aussie dollar may be the fifth most traded currency in the world
but only one bank makes active markets in it in New York, despite
the attractions of Aussie bonds and stocks. And north Asia - China,
Taiwan, Hong Kong, Korea - is the buzz right now; Asean is
yesterday's story.
Fortunately, the markets aren't waiting for global
recognition. After a false start some nine years ago, a true
non-government fixed-income market is developing. The locals call
it the corporate market, but corporate issuance is just a small
part of a market that includes banks and supranationals. From
around A$12 billion (US$5 billion) of issuance in 1998, volumes
surged in 1999 to A$30 billion. This year underwriters expect up to
A$50 billion.
Issuance is being driven by many of the same factors that are
transforming Europe's capital markets post-Emu. The government has
sharply reduced issuance and could, if it wanted to, pay off all
its debt.
The states have followed suit, with some even setting dates
for total debt elimination. Even Victoria, which just a few years
ago was the country's basket case, is running a budget surplus. And
a large chunk of new infrastructure projects are being pushed
off-budget into the private sector, reducing spending.
Since Australia has a highly-developed mandatory
superannuation (that is, pension) system, demand for fixed-income
securities is still increasing. Bond salesmen like to point out
that the gap between demand for paper and the supply of federal and
state bonds will increase to something like A$80 billion in the
next three years. Equity salesmen wonder where the bond salesmen
get this number. They also wonder how their firm manages to stay
afloat on Australia's razor thin margins, particularly when
underwriting risks and block-trading practices that would turn a US
risk manager white are routinely undertaken in the scramble for
market share.
The surge in bond issuance from locals has been boosted by
favourable swap markets that have allowed a group of foreign
issuers - the now universally reviled Landesbanks - to tap the
Kangaroo market. Perhaps "universally" is unfair: the first issuers
were praised for their willingness to make the trip and explain
themselves to investors. Those that followed, greedily hoovering up
demand for substitute government paper without regard for local
sensibilities, are not remembered kindly.
The domestic instos - institutional investors - have latched
onto credit faster than any of their counterparts in Europe. Credit
derivatives, credit-linked notes, the most sophisticated
real-estate and water securitizations found anywhere and even
project bonds are finding ready homes in the portfolios of
investors who until recently had to be content with duration plays.
Other business is booming too. The introduction of roll-over
relief, just one of a series of tax reforms, has meant that for the
first time Australian acquisitions do not have to be done at a
tax-driven premium. Goldman Sachs, ignoring the fixed-income
market, has instead sent two ex-London-based big guns to grab the
choicest mandates in what will prove to be one of 2000's most
exciting M&A markets. Again though, most of the action will be
domestic restructuring.
And financial innovation - an endangered species over much of
the globe - is alive and well here. Take income securities, until a
few weeks ago one of the hottest games in town. These are
perpetuals and can count as equity for capital hungry banks.
Similar securities have been issued elsewhere but the innovation
here was to sell them as deposit substitutes to retail investors.
One problem with this is that the securities are listed and so
their prices are volatile. Investors are understandably confused by
deposits that change in value. Worse, the prices have been volatile
in one direction: down. So anyone wishing to cash in his "deposit"
to take advantage of Australia's internet stock bubble (yes, they
have one of those here too) faces an instant loss of between 3% and
7% of his initial investment plus the bid/offer spread. Investment
bankers are now looking at the worst affected issues as "very
interesting opportunities for us".
The Australian markets have come a long way. The Aussie
dollar is no longer the high-yield retail play it was. The economy
is a top performer. Financial technology is as sophisticated here
as it is anywhere. In fact, Sydney looks more like New York than
either Hong Kong or London.
Well, almost. Take the lifts at ANZ, whose building on Martin
Place is being refurbished - all of it, all at the same time. So
many builders use the lifts that ANZ has given up trying to clean
them. Staff avoid one lift in particular for its combination of
cement dust and filthy cloth hangings. Unfortunately, this is the
lift that the chief executive of a major Australian company chose
to take with his wife, having been invited to drinks in the bank's
revamped suites. Worse still, while some banks have modern art on
the walls, ANZ's lift sported graffiti that made a Robert
Maplethorpe photo look like Fra Angelico's Annunciation. The CEO
and his wife needed that drink when they got to the top floor.
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