Debt collector decries rate cut

Reserve Bank of Australia may have taken its foot off the interest rate brake too soon, when it cut rates earlier this week, a debt collection agency says.

Prushka Fast Debt Recovery chief executive Roger Mendelson said consumers could use the rate cut as an excuse for a spending splurge and rack up more personal debt.
Based on the evidence from our own database, it indicates there is no crisis and we are long way from that.''

The central bank cut interest rates by a quarter of a percentage point to 7% this week in a bid to boost the slowing economy.
It was the first cut to the official cash rate since December 2001, after the RBA raised rates 12 times to a 12-year high of 7.25% to curb rising demand and inflation.
Mr Mendelson said he doubted the market's forecast for many more cuts in the near future.

"I don't think there is going to be a rapid succession of rate cuts unless there is a real deterioration in the economy,'' he said.
"The Reserve Bank seems to be keeping its option open.
"It is why I believe there had to be a climate of fear around to keep consumers focus on reducing consumption, but also actually reducing debt.''
Consumer debt, though, was still too high in Australia, Mr Mendelson said.
"That is an underlying problem in the country,'' he said.

"Higher interest rates help to keep the pressure on the consumers to reduce spending.''
Consumers should use the extra cash courtesy of the recent fall in rates and any future cuts to repay their debt, Mr Mendelson said.
"Otherwise, that is going to come back to bite us,'' he said.

"That could emboldened consumers again, and we don't need that at the moment.''
There were two ways for household debt to fall, Mr Mendelson said.
"Consumers rein in their spending,'' he said.
"And they don't occur greater consumer debt to fund consumption.''

"There is evidence that consumer spending has been declining, but it has taken a very long time to get to that point.''
Retail sales data for the June quarter from the Australian Bureau of Statistics confirmed this decline with spending down 0.6%, seasonally adjusted, in the three months.
People should consult a financial adviser or accountant if they have concerns about their finances, Mr Mendelson said.

"An hour or two with a accountant would really offer helpful advice to help people budget and look at their cashflow,'' he said.
Mr Mendelson said if a person defaults, it ends up their credit file.

Big Bailout:- Puts shares on road to recovery

The world financial system's vital signs continued to show improvement yesterday in response to the US Government's US$700 billion "mother of all bailouts". Sharemarkets, including the NZSX, made welcome gains.

Next to Wall St's 4 per cent rise on Friday and the 8.8 per cent gain by Britain's FTSE Index the same day, the NZX-50's 2.11 per cent gain yesterday looked fairly modest.

Market watchers said the large international investors who could influence the local market were clearly busy elsewhere.British and American gains, and yesterday's 4.5 per cent rise by Australia's ASX 200 were partly fuelled by bans on short-selling of financial stocks in those countries. Short-selling enables investors to profit from falling stock prices, and has been cited as a factor in the collapse of Lehman Brothers last week.

The US Treasury plan will use taxpayers' dollars to buy "toxic" mortgage debt from financial institutions. In the US on Friday, Washington Mutual shares rose 42.1 per cent, Citigroup 22.7 per cent, Morgan Stanley 20.7 per cent and Goldman Sachs 20.2 per cent.

In Britain, Barclays, Lloyd TSB, HSBC, Royal Bank of Scotland, HBOS and Standard Chartered went up between 17 and 32 per cent, and in Australia, ANZ was up 8.13 per cent, National Australia Bank 5.65 per cent, Commonwealth Bank 4.45 per cent and Westpac 4.93 per cent.

Meanwhile, Wall St's two remaining big investment banks, Goldman Sachs and Morgan Stanley, yesterday received regulatory approval to turn themselves into traditional bank holding companies.The technical change will give them rights to obtain emergency funds from the US central bank, the Federal Reserve.In response, banking stocks led the sharemarket recovery.

Wolseley may have plumbed the depths but recovery is due

The stock market would seem to think so. Shares in the world’s largest plumbing supplier have risen by nearly three quarters from the eight-year low they touched in July – the day when the company announced the scrapping of its final dividend. Their latest advance, the biggest gain in the FTSE 100, came with yesterday’s full-year results – despite the mere indication that the deterioration in American and European construction markets that had brought the company so low is about to change. The best that Wolseley could offer is that US commercial and industrial markets – many of which are still benefiting from capital commitments made in better days – are expected to remain stable for the next few months. The majority of its markets – principally those exposed to housebuilding – are set to deteriorate further in the short term.

Wolseley, often touted as a rights issue candidate, said that it did not need to raise fresh equity for now. Secondly, it has begun a “fundamental review” of Stock, its loss-making US building supplies business, where it has already cut four fifths of the workforce.

The more likely option is that Wolseley retains those territories with sound longer-term growth potential – for instance California, Florida and Texas, which are forecast to benefit from continued internal migration – and jettison those, such as the upper Midwest, thought to be in steady decline. Tighter management of working capital, property disposals and a moratorium on acquisitions meant that the company was able to keep net debt steady at £2.5 billion – despite a £320 million rise in its reported borrowings from the appreciation of the euro. With Wolseley now being explicitly run for the maximisation of cash – a radical about-turn from its previous financial year, when it spent £1.7 billion on acquisitions – that burden should start to ease.

At 470p, or 12 times this year’s earnings, the shares provide a vivid illustration of the stock market’s willingness to discount more bad news: investors expect a recovery that Wolseley’s management has yet to detect.