Wayne Swan (Lilley, Australian Labor Party, Treasurer) Share this | Link to this | Hansard source

by leave—Three years ago to the day the government moved decisively to secure our financial sector with guarantees of bank deposits and wholesale funding. This ensured the continued flow of credit right throughout our economy. Two days later we moved to put in place the first of three rounds of fiscal stimulus.

Together, these actions ensured Australia avoided being dragged into the worst global recession in 75 years. In doing so we avoided the massive capital and skill destruction that we saw in many other developed economies, and we avoided the tragic loss of dignity that has hit working families all around the world and in particular in major advanced economies. Over the past 3½ years I have periodically updated the parliament on developments in the global economy and their impacts at home. Given renewed financial market turmoil and the forthcoming G20 meetings, it is appropriate that I do so again today.

Dangerous new phase

Going into the crisis we said that it would be a long and difficult road out. In both the United States and Europe, economic growth remains weak, unemployment is unacceptably high and sovereign debt levels are very concerning. In recent months, we have seen increased volatility in global capital markets in response to concerns about the implications of a debt default in Greece and possible broader implications. European bank stocks have plunged and a number of European banks and sovereigns have had their credit ratings cut. The ongoing weakness in the US economy is also depressing markets. As the Chairman of the US Federal Reserve, Ben Bernanke, noted in September, the US economy faces 'significant downside risks'.

The uncertainty in the global economy, particularly in Europe, dominated the IMF-World Bank and G20 finance ministers' meetings which I attended in Washington two weeks ago. At these meetings I joined other ministers in impressing on our European colleagues that Europe needed to lift its game in dealing with what is fundamentally a European sovereign debt and financial crisis, but which has the capacity to affect us all. The depth of international concern was clearly recorded and Europe recognised that more needs to be done.

In response, European leaders have moved to implement swiftly its 21 July agreement to scale up the European Financial Stability Facility. And over the weekend the leaders of Germany and France have signalled they will outline a comprehensive plan to recapitalise banks and find a 'durable' solution for Greece's debt load. It is critical that European leaders now deliver at their 23 October meeting.

Need for global action

This is primarily a European crisis that requires a European led solution. The challenges facing the United States will similarly require US solutions. But, as we saw three years ago, developments in the global economy can impact on our own economic performance.

I remember very vividly those historic days with my G20 colleagues in Washington in 2008 when we resolved to take the action required to avert a global economic meltdown. If the worst fears for Europe are realised this time, the impacts on our own economy could be just as severe as those in 2008. That is why international engagement is just as important now as it was at the height of the global financial crisis.

I was encouraged by the success of our efforts at the G20 in Washington just a few weeks ago in highlighting the seriousness of the threats we face and in propelling more action from our European colleagues. But much more needs to be done. In the coming days, I will meet with my G20 colleagues as we prepare for the G20 leaders summit, to be held in Cannes in a month's time. My clear message will be that both individual and collective action is needed to address global financial market volatility and put the global economic recovery back on track.

Developed countries—in particular in Europe—need to put their budgets on a sustainable footing, while supporting growth where possible. Europe needs to regain the confidence of markets in its capacity to meet its debt obligations. Progress on the EFSF is encouraging, but more will be needed to convince markets. Collectively they need to demonstrate that the current sovereign debt crisis will be resolved in an orderly way, with arrangements put in place to avoid contagion throughout Europe and beyond. This includes the need for a credible plan to recapitalise the European banking system.

On the US front, more is needed to support the faltering recovery, while putting its budget on a sustainable path in the medium term. Tough decisions must be made on both spending and tax measures. The US congress needs to end its partisan politics and support President Obama's American Jobs Act, which would support growth and help bring down the unemployment rate from its unacceptably high levels—still over nine per cent.

More broadly, all countries need to undertake reforms that will both lift and rebalance global growth. With hundreds of millions unemployed globally, it is vital that this work has at its centre the creation of jobs. Developing countries need to lift domestically generated growth and move to more flexible exchange rates. I argued this case directly to Chinese leaders on my recent visit to Southern China, as well as at the IMF and G20 meetings in Washington, and I will continue to do so at this week's G20 meetings in Paris. We also need to ensure the IMF has the resources to support adjustment, in particular in Europe, and meet all possible contingencies. This was a message I clearly conveyed to my colleagues at the IMF annual meetings and have continued to stress as we head toward next week's meetings.

Global markets have been rightly concerned about the lack of political will shown in both the United States and Europe to deal with this crisis. The level of commitment necessary to address current problems is no less than what was needed to defend economies from the global financial crisis in 2008. Recent progress in Europe is encouraging. But we must continue to build on this through the G20 as we head towards the Cannes leaders summit.

The global financial crisis was a crisis that virtually no-one saw coming. Now we have a crisis that virtually everyone has seen coming. It is our responsibility to provide the political leadership to avert this. The G20 can provide the support for countries to take the individual actions necessary while bringing together the world's most systemically important countries to work collectively to avoid another crisis like we saw in 2008.

Australia's fundamental strengths

While Australia is not immune from global developments, our strong fundamentals mean we are better placed than just about any other country to deal with the current global instability. We took action to avoid recession, keep unemployment low and keep the doors of business open through the global recession. And we are in the right place at the right time, with Asia continuing to grow strongly. Around two-thirds of all our exports go to Asia. While some of the goods we export to China go into their exports to the US and Europe, around 80 per cent are predominantly for China's own domestic use.

By contrast, Australia's direct trade and financial exposures to the euro area are low. Around 10 per cent of our total trade is with the euro area and Australian banks continue to be among the world's highest rated and have negligible direct exposure to peripheral European sovereigns, including zero exposure to Greek government debt. This underscores the importance of political leaders in this country not talking down our economy and undermining confidence—this is simply too important to ever play politics with. We have a growing economy, low unemployment, strong trade linkages to rapidly growing Asian economies, a strong pipeline of business investment, a healthy financial system and very low government debt.

The IMF shone a spotlight on these strengths last week, confirming that our strong fundamentals and our successful response to the global financial crisis mean that we are much better placed to deal with global instability. And it was just last week that we saw another solid rise in retail sales, very healthy export growth and signs of strength in apartment approvals.

You cannot read too much into these monthly figures, but they do point to a domestic economy that is more resilient than a lot of the commentary has been suggesting. And we are getting on with the big reforms to strengthen our economy and position it for the future—investing in skills and infrastructure, reforming our tax system and beginning the transition to a clean energy future.

Despite our fundamental strengths, we know that the Australian economy and our budget will not remain untouched from global instability. The domestic fallout from these global events is most evident in our share market, with Australian shares falling to 2½ year lows recently, though recovering somewhat last week. Not surprisingly, global uncertainty and financial market turbulence have unsettled businesses and consumers—and reduced confidence will have consequences for our own economy.

In the midst of this uncertainty, some commodity prices have fallen, with base metal prices dropping close to 20 per cent over September. But coal and iron ore prices—the commodity prices most important to the Australian economy—are holding up relatively well to date, but remain vulnerable to any sharp slump in global demand. These developments have added to some of the existing stresses on some parts of the economy that are already being affected by factors such as the high exchange rate and cautious consumer.

Conclusion

The challenges facing the world economy are the most severe since the global financial crisis. There is a crisis of confidence in the capacity of political institutions in the United States and Europe to deliver the policy responses required. That is why I will be making clear to my G20 colleagues that urgent action is needed if we are to avoid a return to the global economic dark age of 2008.

Even with action in Europe and the United States, it is inevitable that this global volatility will impact upon us here and that we will continue to see periodic bouts of instability. But we can face this crisis with confidence, built on our strong fundamentals, our position in the world, and with the knowledge that we stared down the worst global recession in 75 years. I present a copy of my ministerial statement, The global financial crisis three years on.

I ask leave of the House to move that the member for North Sydney speak for 11 minutes.

Leave granted.

I move:

That so much of the standing and sessional orders be suspended as would prevent Mr Hockey speaking for a period not exceeding 11 minutes.

Question agreed to.

Joe Hockey (North Sydney, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

The Treasurer has informed the House of Representatives of his concerns about recent developments in the European economy in particular and financial markets and the uncertainty surrounding the outlook. I say to the Treasurer that I share his concerns. I am not overly alarmed, nor am I unduly pessimistic, but I think we need to be realistic about the challenge that lies before us. Whilst the Treasurer says in his ministerial statement that the sovereign debt crisis is a European challenge at the moment, I fear that the Treasurer—as he walks out of the chamber—does not actually understand the ramifications that can flow through to the rest of the financial markets and financial institutions.

Even though the Americans, quite rightly, after the financial crisis had a very comprehensive health check of their financial institutions and put in place the appropriate amount of money to ensure that a bailout of financial institutions was properly funded, the Europeans failed to do so. In many ways the Europeans denied that their financial institutions were as severely affected as those of the Americans. Moreover, the Europeans were very slow to allocate funds that would be necessary to recapitalise their financial institutions. We are now seeing the Europeans pay a very significant price for this act of denial.

What is of more concern to me is that, even though the primary sovereign debt is being held by European banks, and even though in those situations they are not being fully transparent about the risk on their balance sheets of their exposure, particularly to Greek but also in other ways to Italian and Spanish debt, I do not think enough is being done by the G20 and others to properly identify the derivative risk that is flowing through to other financial institutions around the world. Of course, that was the unidentified, poorly explained and rather dramatic impact of the original financial crisis in the United States and Europe in 2008. It is the secondary flowthrough of laid-off risk by those banks on other institutions. Should the tens, perhaps hundreds, of billions of dollars of sovereign debt exposure of European banks be held by those banks only, then obviously the risk can be quarantined and the Europeans will be able to deal with it. But it is when some of that risk is being laid off through derivative products that the real impact becomes a contagion and flows through to other financial institutions, particularly large American financial institutions. In many respects, that is one of the reasons why the wholesale funding markets are now dramatically increasing the cost of funds—and it is not just in Europe; it seems to be the case in the United States as well.

As I said in my covered bonds speech today, that will have an impact in Australia, as the Treasurer identified. It will have an impact because Australia is an importer of capital, and Australian financial institutions do rely on fundraising in international markets to be able to offer competitive rates to Australians. But the fact of the matter is that, if the G20 as well as financial regulators do not properly identify the second-round impacts of a default, and urgently, then the contagion impact will potentially be as severe as the original financial crisis back in late 2007—because that is when it actually started; you can see the significant growth in spreads late in 2007, really October 2007, and see that it started to have an impact. Now we are seeing occurring a not totally dissimilar impact on the cost of funds.

I was a little disappointed that the Treasurer, in his review of government action three years ago, failed to give proper recognition to the member for Griffith—who is at the table—who as Prime Minister at the time was obviously the person most responsible for the government's actions in response to the global financial crisis. If you believe the Treasurer, it was all his own good work! But, quite frankly, I have not changed my view that the government's actions were but one of a number of factors that got us through that financial crisis, as the IMF properly identified in a very recent report. It describes Australia's 'enviable' performance over the last four years as being attributable to, among other things, 'its strong position at the onset of the crisis' and 'a healthy banking system, a flexible exchange rate, and robust demand for commodities from Asia'. It is also the case that we did not have a housing crisis equivalent to that of the United Kingdom, Spain or the United States, primarily because the demand for housing in Australia, even today, far exceeds supply. That is why we did not have a complete collapse in the housing market, especially not in comparison to the United States. So there were a number of factors at play.

The government's capacity to provide fiscal stimulus at that time was only because it inherited an unbelievably generous fiscal position from the previous government: $45 billion in net assets. We now have $110 billion in net debt. The government received our bipartisan support on the first stimulus package, which included an increase in pensions—that was about $10 billion—but we argued at the time that the second stimulus package of over $40 billion was too much, it was wasteful, and that ultimately the Australian people would not thank the government for engaging in that sort of activity. And, because the government was so expansive in its fiscal stimulus, it meant that the Reserve Bank cash rate never dropped below three per cent. As we know in Australia, we have what the RBA has termed a 'high transmission rate': because most Australians have variable home loans, the dramatic movements in the cash rate from the Reserve Bank flow through almost immediately to households—even though, in that case, many Australian households chose to increase the repayment of principal on their mortgages rather than spend the benefit associated with the dramatic drop in interest rates. The fact of the matter is that, had the government not engaged in such an over-the-top fiscal stimulus, the Reserve Bank would have further reduced interest rates. But at the time, as is now rapidly coming to the fore, there was a debate led by Professor Warwick McKibbin—who is quite rightly on the board of the Reserve Bank—that there was a danger in going too far, and he was right to say so. That fiscal stimulus had tremendous waste, with $900 cheques going to dead people and people living overseas; pink batts that people did not want going into homes, destroying the pink batt industry; and overpriced school halls.

The fact is that we were still enjoying extraordinary demand out of China for our commodities and we did not have a housing crisis. Whilst our financial markets did need government guarantees, the government had so many different positions in such a short period of time that it created confusion among depositors and left cash management trusts in the lurch, where they still are today. So there were a range of different things.

The government must get back to surplus. This is what the Treasurer is urging the Europeans to do—to get their own fiscal settings right. Yet this is a government that has just passed a carbon tax which blows a $4½ billion hole in the budget and that is about to introduce, and may well pass, a mining tax that adds to the structural deficit. What can they possibly be thinking? They are not listening to their own rhetoric. It became patently clear at the end of the Treasurer's ministerial statement why he was making this further statement today: he is now trying to prepare the ground for failing to deliver a surplus next year. That is what this is about. That is what his ministerial statement was about. 'We're not affected but we are affected. Everything's okay in Australia, but we might not be able to make a surplus because of the challenges in Europe.' The time for excuses has come to an end.