The big bank burglary

Christopher Joye

Coolabah Capital

In The Australian Financial Review today I explain why it is hard to imagine a more insanely stupid and economically irrational decision than South Australia's big bank double-tax, which is likely illegal, has no policy basis whatsoever, and could end up generating zero net revenue even if it's implemented (click on that link to read for free via Twitter or AFR subs can read here). Excerpts enclosed: 

"And this comes from someone who was recognised as the defender-in-chief of the government's big bank tax, which South Australia's former taxi-driving treasurer deemed he could clone sans the logic for the introducing the federal levy in the first place. It's globally embarrassing for Australians that one of our state's treasurers—and, more colourfully, ex minister for roads who had to resign because of traffic offences—would unilaterally select five of our most successful businesses and slam them with a double-tax simply because he wants to cook his books. After the no less asinine Western Australian treasurer blurted out that he might emulate this bank burglary (the major states have sensibly ruled it out), I had a call from an investor overseas who alleged that our policy process looked like it was being pulled from Greece's playbook. Another London-based trader warned "the wonder down under is resembling a 'banana republic' again given the constant political change (is yet another prime minister going to be knifed?), your reliance on commodity exports, and the political propensity to rip-off your best businesses". Recall that it is the commonwealth government, not South Australia, that guarantees the big banks' retail deposits free of charge, and implicitly guarantees their senior bonds and wholesale deposits, which the Reserve Bank of Australia estimates reduces their cost of funding by 0.2 per cent to 0.4 per cent annually. It is this specific taxpayer subsidy that Scott Morrison's rational and reasonable 0.06 per cent annual levy was designed to price for the first time. Senior Liberal frontbencher Christopher Pyne reiterated this publicly when noting that "the commonwealth government provides an effective guarantee for the big banks". "And in response to that, the commonwealth expects the big banks to make a contribution to getting rid of Labor's budget deficit," Pyne continued. "One wonders what the justification is for a state government because the last time I looked they didn't provide any kind of guarantee [of] the big banks." The government, not South Australia, is also responsible for regulating the banks and, through the RBA, furnishing them with valuable emergency liquidity facilities in funding crises as their official lender of last resort. Adelaide cannot claim any of these bases to rationalise its own annual tax, which is legally unconstitutional, practically a form of theft, and could paradoxically result in negative net revenue. Most bizarrely, if the major banks and Macquarie decided they no longer want to do business in the state—and why would they when they have been so savagely discriminated against—they would still have to pay the tax even though they have no deposits and/or loans in the region. And pity the poor South Australian business that wants a large loan from the majors right now—it is questionable whether it will secure credit approval until this mess is resolved. Yet perhaps the craziest aspect of Treasurer Tom Koutsantonis's brain explosion is that he has targeted the tax at the single largest cohort of lenders to the "festive state". The major banks own 40 per cent, or $5 billion, of the $13 billion of bonds South Australia has issued to fund itself. Yes, these knuckle-heads have decided to double-tax their own creditors! And it should be no surprise the major banks have started dumping these bonds. Why wouldn't they? There is little doubt that South Australia has proven itself to be an immensely irresponsible operator. You could not possibly trust them with your money. ANZ has been the first to move, and the interest rate South Australia has to pay on its debts has started increasing quickly. If the major banks dump all $5 billion of bonds, and refuse to buy future issues, which is what I would do, South Australia will have to find other investors to fill the gap. That will not be easy. It is entirely possible that the interest rates on its debts rise by a sufficient margin to completely wipe-out the revenue collected from the double-tax. Western Australia's Ben Wyatt would face the same fate." Read for free via Twitter.





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Christopher Joye
Portfolio Manager & Chief Investment Officer
Coolabah Capital

Chris co-founded Coolabah in 2011, which today runs $7 billion with a team of 33 executives focussed on generating credit alpha from mispricings across fixed-income markets. In 2019, Chris was selected as one of FE fundinfo’s Top 10 “Alpha...

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