Austerity Not Working Amid Safe Asset Shortage, Says ANZ’s Smith

Austerity policies designed to shrink the size of government budgets are holding back growth in Europe, said Mike Smith, Australia & New Zealand Banking Group Ltd.’s chief executive officer.

High valuations for commercial banks will also persist as long as central banks continue quantitative easing, said Smith, the head of the country’s third-largest lender by market value, in an interview with Australian Broadcasting Corp. television today.

An index of Australian banks has risen to the biggest premium to resources stocks on record, according to data compiled by Bloomberg, and ANZ’s share price has risen to more than twice the value of its net assets for the first time since 2008 even as the growth in its net income slows.

“There is a huge amount of money chasing fewer and fewer good quality high-yielding assets,” he said. “Obviously the supply of good assets is in demand. That creates an increase in price” for assets such as bank stocks.

Higher capital requirements intended to limit the amount of debt being taken on by commercial banks were slowing credit growth in Europe, and Australia’s financial regulator, the Australian Prudential Regulatory Authority, should “push back a little bit” on new banking rules being proposed in the region, Smith said.

‘Just Doesn’t Work’

“If you think about it, what does Europe need to get out of the mess? The only thing that will actually work is growth, and if you constrain, if you take credit supply out of the contents of Europe, how are you going to get growth?” he said. “All of this austerity just doesn’t work, you’ve got to create some stimulus as well.”

Non-farm employment in the U.S. picked up more than forecast in April, the Labor Department reported May 3, sending that country’s jobless rate to a four-year low amid growing confidence about the country’s economic outlook.

Still, the additional liquidity created by banks in the U.S. and U.K. expanding their balance sheets through quantitative easing “is not going to dry up any time soon,” even as the yield on longer-dated bonds suggests the market anticipates rising U.S. interest rates in about 18 months’ time, Smith said.

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