Darren Cheeseman (Corangamite, Australian Labor Party) Share this | Link to this | Hansard source

My question is to the Prime Minister. Will the Prime Minister update the House on national and international efforts to stabilise financial markets?

Kevin Rudd (Griffith, Australian Labor Party, Prime Minister) Share this | Link to this | Hansard source

I thank the honourable member for his question. In recent weeks, many governments have taken steps to provide guarantees and other support to depositors and banks borrowing in global capital markets. A variety of bank guarantees have been implemented by governments across the developed world—in the US, the UK, the euro area and Korea. Emerging economies such as Indonesia have also implemented guarantees for their own banking sectors. While conditions remain fragile across the global economy, there is beginning to emerge evidence that these guarantees have boosted confidence and bank funding costs have begun to come down. Although it is very early days, these guarantees appear to be having an early effect.

For the benefit of honourable members, I will draw their attention to what has happened in a number of foreign jurisdictions. On 3 November the United States increased coverage of its deposit insurance scheme from deposits of US$100,000 to US$250,000 per depositor through to 31 December 2009. In the United States indicators are that US bank funding costs have declined since the guarantee was introduced, with the US dollar three-month LIBOR falling from 4.21 per cent at the close of business on 2 October to 2.18 per cent as of 11 November. In the UK on 3 October the government raised the value of deposits it ensures and, following this, the three-month GBP LIBOR has fallen from 6.28 per cent at close of business on 2 October to 4.38 per cent at the close of business on 11 November. The LIBOR is the London interbank rate, by the way. On 7 October the European Commission increased the minimum level of coverage of deposits from €20,000 to €50,000, and the three-month euro LIBOR has fallen from 5.34 per cent at close of business on 6 October to 4.3 per cent at close of business on 11 November.

I draw honourable members’ attention to the following, which was contained also in the recent statement by the Reserve Bank of Australia and which says:

Following the announcement of these policy actions designed to improve confidence in financial systems, US dollar term spreads began to narrow in mid to late October. There has been increased debt issuance in money markets at terms longer than one week.

These are very early tentative beginnings of some form of normalisation in global financial markets. There is still a long way to go but these are welcome, albeit small, developments. In Australia, following the announcement of the government’s guarantees on 12 October, spreads have begun to fall. Liquidity as measured by the spread between the 90-day bank bill and three-month overnight index swap in the Australian dollar market has fallen from 93 basis points down to 47 basis points as of yesterday.

Australian banks were also experiencing some success with liquidity-raising efforts, and the cost of wholesale funding has begun to come down. Since the Australian guarantees were introduced, the 90-day bank bill—that is the proxy interbank rate for the Australian dollar market—has fallen from 6.03 per cent at close of business on 10 October, which was just prior to the bank guarantees being implemented, to 4.87 per cent at close of business on 11 November. Again I would say these are very early days but we begin to see some small evidence of the beginnings of a return to some level of normalisation in financial markets here. There is still a long, long way to go and the path will not be even.

At the upcoming meeting in Washington, governments around the world will be acting together on how to bring about appropriate regulatory changes to deal with the future demands of financial markets as well. A lot has been achieved so far on the national front; much more needs to be done on the international and co-ordinated global front. Therefore, at the Washington meeting on Saturday, there will be intense discussion of new proposals dealing with financial markets and the world economy. The summit will address the financial and economic challenges the world faces from the ongoing global financial crisis which, as honourable members will be aware, has also become a global economic crisis in terms of the impact on growth and jobs.

Around the globe more cooperation is needed to deal with these challenges, and that means that we need an appropriate response to regulatory reform based on transparency, market integrity, responsibility for risk management and a proper approach, globally, on the question of remuneration packages for executives within systemically important financial institutions as well as effective cross-border consistency.

We are still in the midst of this crisis and there is a long, long way to go. But Australia will work with other leaders to commission a broad program of reform and strengthening of financial markets and institutions. The work will be brought back to leaders for further deliberation and decision. We will be discussing specific proposals, including improving the representativeness of key bodies like the Financial Stability Forum and strengthening the range of lending facilities available from the IMF and the World Bank.

These are important matters for the global community, as is the following: how the countries of the world combine in terms of coordinated or cooperative macroeconomic action, fiscal policy stimulus and, where possible, monetary policy stimulus in order to engender greater economic growth, given the shock which has been delivered to real growth rates around the world as a consequence of the global financial crisis.

This financial crisis is moving into an economic crisis affecting jobs in the real economy and therefore the need for coordinated or at least cooperative fiscal and monetary policy action across the principal economies of the world has now become necessary. The move by China that we discussed in the parliament briefly the other day is welcome. We need to see more coordinated action across the major economies of the world, given the large amount of activity which is being sucked out of the global economy as a consequence of the crisis, and therefore the role of governments at this critical juncture is to support growth in the difficult period ahead.

The Australian government will work cooperatively and collaboratively with our international partners in order to address the challenges on these three fronts: regulatory change now, regulatory change for the future for the financial system and coordinated, where possible, action on fiscal and monetary policy stimulus, with the end point being to support growth and to support jobs. We, the world community, are all in this together.