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Wednesday, 17 June 2009
Page: 6357


Mr HOCKEY (5:19 PM) —I stand on behalf of the coalition to indicate our support for this legislation and also indicate that we will at the appropriate time be moving an amendment, which I will talk about a bit later. The Guarantee of State and Territory Borrowing Appropriation Bill 2009 provides for a standing appropriation to pay for any future claims should any state or territory government default on loans that are guaranteed by the Australian government’s guarantee of state and territory borrowing. Money is to be appropriated from the consolidated fund and if there is insufficient money in the fund then the bill provides authority for the Commonwealth to borrow money to pay claims to creditors.

Mr Deputy Speaker, you would hope that there is going to be a default in very, very unlikely circumstances. Therefore, this bill is more procedural in that it provides substance to the guarantee which has already been announced by the government and which the market is already, I might say, pricing into the issuance of government bonds. Even though state governments have declared that they will access the government guarantee, it is my understanding that the guarantee has no effect until this bill is passed, because there would be no standing appropriation for that guarantee. But the fact of the matter is that the market, quite understandably and appropriately, is pricing into the cost of semigovernment issuance a AAA federal government guarantee.

It is estimated the states will increase their borrowings from the existing $100 billion outstanding to $160 billion in the next three years. At this stage, I understand, only New South Wales has indicated they will be using the Commonwealth guarantee, although I do recollect that Queensland announced it would be doing so yesterday. The pricing of the guarantee is an issue that we are in dispute with the government about. This bill of course makes no provision for specific pricing of the guarantee, but currently the pricing of the guarantee is 15 basis points for AAA rated issuance and 20 basis points for AA-plus on existing loans, and 30 basis points for AAA and 35 basis points for AA-plus on new issuance. So there is only a small spread of five basis points between AAA and AA-plus, which was a massive concession by this government to the Queensland government, which has had its rating downgraded.

Now, the problem, as we stated at the time, is that there is not sufficient incentive for the state governments to do everything they can to preserve their AAA rating if there is not a sufficient penalty involved in the difference between having a rating of AAA and one of AA-plus. I outlined that in a press release issued on 25 March 2009, where I noted:

The price for less than a AAA issuance provides no incentive for States to exercise fiscal discipline, that is that States can spend all they want, lose their AAA credit rating and it costs them far less than what the market is charging.

Having said that, New South Wales yesterday had Moody’s reaffirm its AAA rating, but Standard and Poor’s expressed some level of concern about the state of New South Wales’s budget—and in Australia S and P are seen as a more diligent and credible rating agency than Moody’s, for a number of reasons. The interesting thing is that New South Wales won the support of Moody’s because they were not taking their budget into as substantial a deficit as had been expected.

One of reasons for that is quite clear when you start to delve through the detail of state budgets: the windfall payments from the federal government are propping up state Labor budgets, and the net impact is that the states are in fact in some cases reducing and/or replacing their own capital expenditure with the money that is provided by the Commonwealth. That should be alarming in itself, but it also devalues the stimulatory impact of Commonwealth government expenditure because it simply substitutes state government expenditure with Commonwealth expenditure. The interesting thing is that it is the states that have traditionally always carried, and still do carry, the great bulk of infrastructure expenditure in Australia, as is appropriate. Roads, public transport, schools and hospitals are all, in the main, run by state governments. Therefore, not only new capital works programs and the integration of those capital works programs into existing infrastructure but also, significantly, the maintenance of those capital works programs are very much the domain of state governments.

Given all of that, it is quite clear that when the Australian government instituted a wholesale funding guarantee, when it introduced a guarantee of deposits in authorised deposit-taking institutions, that had a profound distortional impact on financial markets. And a lot of the pain at that particular time was felt by state governments in the semi-government market, where not only were they finding it difficult to price new issuance but it was also very hard to get away any new state government issuance. The net result was that the semi-government market dried up, or became illiquid. By becoming illiquid, it became a roadblock to the ongoing funding needs of the states.

States, I might add, have traditionally run deficit budgets, primarily because they have those massive capital expenditure items on their balance sheets. It was arguably the Greiner government of New South Wales—which not only reorganised the state budget but also changed the rules governing accounting procedures for state budgets—that for the first time started to run surplus budgets. In running surplus budgets, it managed to not only pay off state government debt but importantly reduce state liability, and the most profound way of doing that was through the sale of the State Bank of New South Wales. Obviously, there were also the sales of the State Bank of Victoria and latterly in South Australia. The Queensland government never quite had a state bank, although it had a shareholding interest in a financial institution. Western Australia has its own unique circumstances with the fabulous WA Inc.!

That actually reminds me of the debate that we had in question time today, where the Prime Minister was asked about Labor’s experience with banks and, naturally enough, refused to answer the question, because it is not an experience that perhaps the Prime Minister would willingly want to recall—the State Bank of Victoria with its investment banking arm, Tricontinental; the State Bank of South Australia with its finance arm, Beneficial Finance; and WA Inc. and the very colourful relationship between state Labor and Rothwell’s and Laurie Connell and some of the grand old names from the past that Minister Snowdon at the table would be well familiar with.

In so many of those banking failures—and it was a very long time between those banking failures and previous banking failures where it was necessary to separate out the bad banks and the bad loans—much of the bad debt that became a massive burden for taxpayers in those states was linked to commercial property.

This was most spectacularly seen in the case of the State Bank of South Australia. Despite expressed provisions of legislation in the parliament that prevented the State Bank of South Australia lending money against real estate outside of South Australia, through Beneficial Finance and through activities in New Zealand—from memory—the State Bank of South Australia engaged in one of the most audacious and free-wheeling loans of public moneys to property developers and commercial property owners that had ever occurred in Australia. That is a bold statement but it is real.

I recall state treasury officials from South Australia coming to visit the New South Wales Treasury and asking us, ‘How do you separate out the bad bank from the good bank in South Australia?’ We pointed out, correctly, that in New South Wales we had done everything we could to avoid going down that path, because of the massive impact on public confidence—as witnessed with the State Bank of Victoria issues and the separation of a good bank and bad bank. We emphasised that it depended on how big the bad bank was. I hope my memory is not failing me, but in the case of the State Bank of South Australia, which had around $19 billion of assets at that time, we were advised in absolute confidence that $13 billion was impaired. I suppose I have broken that confidence today but the passage of time maybe allows me to do this.

Someone pointed out to me some years later that at one stage South Australia had the very best finances of any state in Australia. A premier who attended some of the premiers conferences in the mid-eighties reflected on that and said, ‘When you look at the balance sheets of all the states, South Australia was the most robust and fiscally the best managed state in Australia.’ It went from being fiscally the best managed state in Australia to being a state with such an impaired balance sheet, with the collapse of the State Bank of South Australia and Beneficial Finance, that it was second only to Tasmania in diminution over the years. It was simply unforgivable for the people of South Australia. It ripped the heart out of the commercial sector of South Australia, and it denied a generation of South Australians the opportunity to live in South Australia and to compete with other parts of Australia, if not the rest of the world, in commerce.

I was a commercial lawyer in a law firm that was, in part, responsible for mopping up Tricontinental, and I just marvel at the risks people were prepared to take with taxpayers’ money. It was horrific. The deals were so complicated, running through so many offshore jurisdictions. They were so on-the-edge, and it was taxpayers’ money. The taxpayers were from Victoria in that case but this also applies to the taxpayers of South Australia. It was so risky. If the taxpayers of those states had fully understood the real impact of what their state banks were doing, they would have taken the decision that the former Premier of New South Wales Nick Greiner—and, after him, John Fahey—took, to his great credit, not only to privatise the State Bank of New South Wales but, significantly, to prevent it from opening up an investment arm. At this juncture, I want to pay tribute to John O’Neill, who was the Chief Executive of the State Bank of New South Wales—an A-grade banker, a damn good bloke and a good mate of mine. After identifying the risks to the balance sheets of New South Wales and the State Bank of New South Wales, John got the bank into a reasonable shape to allow it to be privatised.

The irony is that, when we privatised GIO, we thought GIO was a more robust asset. It therefore had an initial public offering which was spectacularly successful and, in fact, massively broadened the insurance index of the Stock Exchange. At that time, QBE was really the only listed insurer. Again, I want to place on the record that Nick Greiner determinedly said that state taxpayers should not be involved with reinsurance. I do recall a vigorous conversation between Nick Greiner and Bill Jocelyn, the general manager of GIO at that time. Nick Greiner said: ‘If you do not get out of reinsurance, we will sell you. It is not something for the taxpayers of New South Wales to be involved with.’ There was a heated argument between the two of them and Nick Greiner turned to me and said, ‘Get rid of it; sell it.’ And thank God for the taxpayers of New South Wales that we did. We well recall AMP buying GIO and making a hash of that. In the end, GIO still remains an appropriately trusted brand for general insurance, but GIO Australia Holdings Ltd obviously no longer exists as a standalone entity because the reinsurance arm imploded—as it would.

Why should taxpayers get involved in this sort of activity? It is this fear that has driven us on our vote in opposition to Ruddbank. We opposed Ruddbank because it is bad policy. We opposed Ruddbank because we look at what has happened in the past when Labor has been involved with financial institutions and commercial property and we say, ‘We will not allow that to happen again—no more taxpayers’ money to be directly involved in individual commercial projects.’ We will not support that. We cannot support that. It is bad policy. Quite frankly, there are better ways to do it if it is about helping commercial property—not in holding up values but in significantly preventing massive distortions in the market. We will talk a little about that at a future time.

It is so important to have transparency in all of these financial dealings. Whether it be in relation to car financing programs, there must be transparency and accountability. Whether it be in relation to commercial property and Ruddbank, there must be total transparency and accountability. In relation to the use of the government guarantee, there must be total transparency and accountability. Day after day I am asking the Treasurer to explain to the Australian people exactly what the liability is of the taxpayers under all the guarantees and the financing requirements of the associated entities. On one occasion the Treasurer said, ‘You do not want to add it up; no-one adds it up.’ I will tell you who adds it up—the taxpayers of Australia add it up because ultimately they are on the hook for that amount of money. If it is a guarantee that delivers a contingent liability that cannot be quantified, then quantify it. Give us a number that would allow the Australian taxpayers to fully recognise that they are providing a guarantee to private sector interests of half a trillion dollars or a trillion dollars. Tell us and the Australian people what the number is. The total liability of the states remains unquantifiable. One of the reasons we have taken a different attitude to this compared with other initiatives of the government is that this is ultimately the same taxpayer. If New South Wales defaults and if Victoria defaults, the taxpayers of those states are ultimately taxpayers of Australia; therefore, there is unquestionably a common interest that supports this bill.

I will be moving an amendment at the appropriate moment. The amendment will allow for the establishment of a register of government borrowings. I think this is very important for a number of reasons. It may not have been necessary to have a register of government borrowings when $55 billion was an issue—which is about the average from the Australian government over the last 10 years. We are now going down the path of $315 billion on issue. It is quite clear that with the semigovernments involved—that is, the state government issuance—there may well be at least an extra $160 billion. Australia should follow the lead of other countries, particularly the United States, and have a full disclosure of who the major lenders are to the Australian people.

Some people in the markets will say, ‘Well, that is pretty complicated; these things are traded all the time.’ So are shares. From the minister at the table to the backbenchers around the place, every member of parliament is required to disclose whether they own shares. There are registers that are run by companies of their shareholders and the general public can go and check who the shareholders are. There is full disclosure in relation to millions of shareholders who own shares in Australia. But perhaps hundreds and maybe even thousands of major entities that own Australian government bonds are not currently required to have their details disclosed. I did go on a mission to try to find out. I asked the Australian Office of Financial Management. I must say that they were quite unhelpful. Given that the government keeps seeking bipartisan support, the AOFM were rather unhelpful. They said that they did not know, only that they had a suspicion about who owned Australian government bonds. But they did point out that the Australian Bureau of Statistics collects data. It goes to the custodians, of which there appear to be just six, and it conducts a survey. When I asked the Deputy Chief Statistician why the Australian Bureau of Statistics could not disclose the domicile of the ultimate holders, he said it would be too revealing and that they would therefore not be able to collect the data. I asked whether they could disclose it by country, and he said no. I asked whether he could disclose it by regions, to which he replied, ‘I’ll get back to you.’ I never heard back.

This is meant to be the independent Australian Bureau of Statistics, of which I have previously had ministerial carriage. I have always held them in high regard, but I think they should be better than that. I would have thought they were more independent than that. I do not know what is going on. I rang a number of individual banks and asked, ‘Would you disclose the countries from which the ultimate buyers of the bonds come from?’ They said, ‘We can’t disclose them because perhaps it is the case that individual banks represent particular countries.’ That is why it is all the more important for our nation and in our economic and political interests to find out who is the major holder of Australian government bonds. Is it the Chinese government? Is it major superannuation or fund management arms from Japan? Is it countries that have investment vehicles domiciled in Bermuda? Or is it just general investors from the United Kingdom? We need to find out.

There is a political issue here. In the last 12 months, we saw the Chinese government—naturally and understandably—express very significant concern about the risk of their massive investment in the United States, particularly in US sovereign bonds. There is a risk not only to Chinese wealth of devaluation of the US dollar but also to Australians if those bonds become far more expensive or are mispriced in the interests and protection of the Chinese investors. Let us find out.

What we do know is this: by the admission of the Treasurer in this place, more than 65 per cent of all Australian government bonds are borrowed by people and interests offshore. That is consistent, because Australia is a net importer of capital. My concern is that we are now doing it on a scale that Australia has not done before. I imagine that, if you go back to World War II, a lot of those bonds were bought by the Australian public in support of the war effort. It is a different equation now. We are borrowing on a scale that we have never borrowed on. It is not the private sector at risk but the taxpayers, particularly if the buyers are governments offshore. In the interests of transparency, in the interests of the nation and in the interests of taxpayers, we need to know who is lending all this money to the Australian government. I do not think there is any underlying inappropriate investor. I have no reason to believe that is the case, but there is a mutual interest here. The government may well use its numbers to defeat the amendment in this place, but I hope that it will be engaging in the debate on the amendment in the Senate, because commonsense must prevail. This is in the national interest, as is our goodwill in supporting this bill.