Download Fragment

Wednesday, 12 October 2011
Page: 11652

Mr HOCKEY (North Sydney) (17:03): 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.