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No sign Govt's fiscal policy soothing market -

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No sign Govt's fiscal policy soothing market

The World Today - Monday, 27 October , 2008 12:14:00

Reporter: Peter Ryan

ELEANOR HALL: Well as industry representatives meet Treasury officials today, there's no sign that
the Government's actions are soothing the market.

Joining us now with the latest is business editor Peter Ryan.

Peter, we've heard today about Colonial First State freezing its fund, is there a sense of panic in
this sector?

PETER RYAN: Eleanor, a lot of what we are seeing is largely human nature. Keep in mind what we've
seen happening around the world over the last few months: banks collapsing in the United States and
Europe; banks being bailed out by the government in the United States and governments throughout
Europe.

So clearly when the Australian Government decided to introduce its unlimited deposit guarantee,
anyone who had money fixed for the long term in these other funds, would naturally be looking for
the safe haven of a government-backed deposit.

That doesn't mean though that any of these 13 funds, 14 now that Colonial First State is included,
that doesn't mean that those funds are in any way in strife but it is clearly a matter of human
nature of moving funds from what is perceived to be a potentially risky product, even a smaller
risk, into a haven where you are backed by government.

ELEANOR HALL: But Peter, can the funds blame the Government's regulation entirely for this run?
Wasn't that already underway some months ago as investors naturally moved to safer investments that
weren't linked to the market?

PETER RYAN: Well, that's right. I mean a lot of the certainty has been with us, not just for months
but the best part of a year. But keep in mind that these funds have been by and large set up in a
very conservative and responsible fashion. Most of them with a balance of, for example, one of the
funds had a 48 per cent exposure to first mortgage commercial property, the rest in cash
management.

That is a typical make-up of a lot of these funds and set up in a conservative manner because a lot
of people have been relying on monthly income from the proceeds of these funds. And also keep in
mind that at least in the case of Perpetual, Perpetual's monthly income fund, the monthly income is
still being paid; people with money in the fund are able to redeem quarterly.

So it is not necessarily an entire freeze, people will still be able to get their money but as the
Prime Minister and Treasurer have been at pains to say, what we have here in these funds, it is not
a bank deposit. A bank deposit gives you the ability to take your money out at call. In these
investment funds and cash management trusts, the money is there for a long term investment and it
is not just a matter of these funds being able to present the money face-to-face when it is called
upon.

ELEANOR HALL: And Peter, we have just heard the Prime Minister again ruling out extending the
deposit guarantee to market-linked investment funds; so what are industry representatives expecting
from Treasury today?

PETER RYAN: The big is confidence. What they want from the Prime Minister, the Treasurer and
Treasury officials is a plan that will push confidence back into the market. To underline the
message that these 14 funds are managing very safe investments. The investments are safe.

We are not talking about collateralised debt obligations; we are talking about safe investments.
All these funds want confidence restored to the market so investors are relaxed and comfortable to
leave their money where it is.

ELEANOR HALL: It is quite a big ask for a government to deliver confidence in the current economic
environment. We have also seen falls on the share market today. Peter, what can you tell us about
that?

PETER RYAN: Yes, Eleanor. The Australian share market fell two and a half per cent in early trade
this morning, actually hitting a four-day intra-day low. Not surprisingly we've seen the
heavyweight banks follow the slide on Wall Street amid those continuing fears of a deep recession.

A short time ago the All-Ordinaries index was down 55 points or 1.45 per cent lower at 3,776. We've
seen three of the top four banks - the National Australia Bank, the Commonwealth Bank and the ANZ
down more than 3 per cent today, while Westpac was down two and a half per cent.

But also significantly, the world's biggest miner and market heavyweight BHP Billiton gave up some
of its earlier gains and that in turn has pushed the market down.

ELEANOR HALL: Peter, the Australian dollar has also taken a battering. What is driving this?

PETER RYAN: Well, we are now seeing the Australian dollar at 61.9 US cents and it is quite
incredible really. The currency has lost 37 per cent of its value over a period of just three
months and it has now hit record lows against the US dollar and the Japanese Yen.

Amid those fears of a global recession and this goes back to Friday when the currency hit a
five-year low against the greenback of just over 60.5 US cents.

This doesn't reflect anything about the strength of the Australian economy but we are seeing a
flight to the perceived safety of the greenback which despite the financial meltdown in the United
States, is being seen as guaranteed to the hilt and a good place to be investing.

The Reserve Bank however was forced to intervene on Friday buying the Australian currency to
support what it sees as a liquid markets, but also to stem what could be seen as a collapse and a
dramatic fall And keep in mind it wasn't really that long ago that we were talking about parity
with the US dollar. Back in July the Australian dollar hit a 25-year high of around 98.5 US cents.

So that is the history and it is not great news for people who are travelling at the moment but
keep in mind, it is good news for anyone exporting to the United States.

ELEANOR HALL: Peter Ryan, our business editor, thank you.