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Stephen Long joins Lateline -

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Stephen Long joins Lateline

Broadcast: 03/10/2008

Reporter: Leigh Sales

Economics correspondent Stephen Long discusses the latest in the global financial situation and its
effect on the Australian market


LEIGH SALES, PRESENTER: It's been a wild week on the Australian and world markets, with sentiment
shifting between exuberance and despair as Congress dithered over the bailout package. By tomorrow
morning, we should know if the US House of Representatives has passed the $US700 billion Wall
Street bailout, and with me to discuss all of that is our economics correspondent Stephen Long.

Stephen, passing the bailout is one thing, but will it work?

STEPHEN LONG, ECONOMICS CORRESPONDENT: It's a band-aid, not a cure, Leigh. And if you want an
indication of what the people in the markets think, just have a look at the money market rates.
Some have soared to record levels in Europe, others are near record levels, the key interbank
lending rates are high. So the credit markets are still locked down and increasingly worrying too
are credit lines to major corporates either being withdrawn or having a huge premium put on the

Now, there's a number of things that flow from that. It shows that banks are still fearful about
lending money to other banks because they don't know who the next bank is that's going to fail and
given that there've been six banks bailed out by governments over the past week, you can perhaps
understand that. And it also shows that the tensions are spilling over from the financial economy
into the real economy in a pretty big way now.

LEIGH SALES: There seems to be a growing concern that this may not be enough to actually stop a

STEPHEN LONG: The US, Europe, London, England, Japan, they're all headed for recession. They're all
toppling into recession. The US pay roll numbers have come out just a few moments ago and they show
that hours worked in the United States are at their lowest level since they began recording that
number in 1964 and the overall job numbers, 159,000 jobs destroyed in September. So there's your
strongest indicator of where the US is heading. Combine that with a housing collapse in America and
Europe which is destroying wealth together with the stock market dives, crashing confidence and
basically you've got an implosion in the key economies around the world.

Now, the interesting and somewhat worrying thing is that the financial crisis that's preceded this
has largely been driven out of excesses within the financial system itself. Now you've got a
combination of the financial system excess and a real meltdown in the major economies. So, I
suggest that you'll get a dynamic out of that and it could be quite worrying how far it heads. The
issue now isn't whether we get recession in those major economies, but how deep and long that
recession is.

LEIGH SALES: Right, well that all sounds pretty gloomy, so to what extent can Australia stay immune
from this?

STEPHEN LONG: Well, we're better off than just about anyone. The key issue really is how much China
gets hit. But Australia, even if we do manage to ride this out, we're looking at a big hit to
growth. The National Australia Bank has cut its forecast for interest rates, saying that the cash
rate set by the Reserve Bank will fall to 5.5 per cent - which is high compared to the rest of the
world - by April next year and that we'd be looking at unemployment going up to 6 per cent with
200-300,000 jobs gone in Australia.

So even if we maintain growth, things still aren't looking that good and if you look at the
composition of that growth, you're looking at a large share of it's still in the minerals economy,
in the farm sector. You look at the rest of the economy, you might be looking at growth of 1 per

LEIGH SALES: We had the Finance Minister Lindsay Tanner on the program last night and he said that
it was premature to be speculating about Australia going into recession. Do you agree with that?

STEPHEN LONG: Well, I think we can speculate about it because it's a real possibility, but I think
he's right to say that it's premature to draw a conclusion at this stage that we're headed in the
same way as many of the other major developed world economies. If anyone's gonna ride it out, we're
better placed than most.

LEIGH SALES: Stephen Long, put this gloom aside and go and have a good weekend.

STEPHEN LONG: I certainly will. You too, Leigh.

LEIGH SALES: Thanks, Stephen.