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The Swiss loans affair: farmers from all over Australia are now in serious financial trouble

JOANNE FINLAY: In the mid 1980s Australia underwent financial history. The dollar was floated, banks were deregulated. And, for the first time, small businessmen and women could borrow money from foreign countries. To do so involved a risk, a gamble. Only now is it clear how many of those borrowers lost out.

JOHN TERESEY: There's literally hundreds of people all across Australia, because now ....

JOANNE FINLAY: John Teresey, foreign currency borrower, turned campaigner. Today more than 300 offshore borrowers are in litigation, and between them they owe their banks hundreds of millions of dollars.

JOHN TERESEY: You know, we'd be talking in excess of $500 million that we're talking of here, in excess, well in excess. But that would be very, very conservative.

JOANNE FINLAY: As the extent of the losses now become clear, the so-called Swiss Loans Affair has emerged as a financial scandal. David Holmes is an astute businessman. A senior executive in the rag trade, he's responsible for an annual sales budget of $30 million. He became a Swiss currency borrower after his family left the city.

DAVID HOLMES: The kids had grown up and I was a little worried for their future, as far as their life was concerned. It was also a drag for me spending a couple of hours in the car every day, going backwards and forwards. So we decided to fulfil one of our lifetime's ambitions and that was to go to the country. We took the big decision and moved to Coonamble.

JOANNE FINLAY: To pay for the farm, David Holmes sold a house and a home unit in Sydney. He also cashed in his superannuation and his life insurance policies. In the mid 1980s he became a wheat farmer. They were hard years for people on the land. Interest rates soared to 16 per cent and more. At the same time, commodity prices fell. David Holmes needed help, and like many farmers he turned to his bank.

DAVID HOLMES: I was probably amongst many other farmers at that stage that had applied to their banks in one way or the other, and so the rural scene at that stage was a bit of a no-no for us poor farmers. So the interest only basis that I was applying for wasn't too fondly received, no.

JOANNE FINLAY: In the mid 1980s foreign currency loans were heavily promoted. The attraction was obvious. Swiss money was cheap money. Interest rates started from as low as 4 per cent. In competing for borrowers, the banks promoted their services. Westpac, for instance, noted that well-informed advice was important. It argued that it had the best foreign exchange team of any bank in Australia. In claiming expertise, Westpac was not alone.

DAVID HOLMES: We borrowed the equivalent of $A400,000.

JOANNE FINLAY: David Holmes' bank was the ANZ, and it wasn't long before his faith in it was shaken.

DAVID HOLMES: That eventually blew out to $720,000 in the November of '87.

PAUL KEATING: That terms of trade ratio is now the worst we've had since the depression.

JOANNE FINLAY: The year was 1986, the year that the dollar plunged.

NEWSREADER: This morning the dollar went on one of its most damaging dives, down to just 57 cents (US).

JOANNE FINLAY: Each time the value of the Australian dollar dropped, the Swiss franc strengthened. In 1985 the dollar bought 2 francs; two years later it was worth only one. That meant that many of those who'd borrowed in Swiss currency now owed about double the amount they'd initially borrowed.

DAVID HOLMES: In my case, where I was a genuine borrower and not a speculator, I needed that money on a long term basis, not on a short term basis. And therefore I shouldn't have been allowed to go into a Swiss loan on a five-year contract when they had historical facts to prove that that would only be a disaster for me in the long term.

JOANNE FINLAY: Like other major banks, ANZ had promoted itself as having advisory services second to none in the field of foreign exchange. The bank promised to provide up to the minute intelligence and forecasts of offshore market movements and currency trends. In David Holmes' case, the ANZ claims that it offered him the option of an onshore loan. He denies this, and he says the Swiss bank loan was his only option.

DAVID HOLMES: It was the only loan that they would enter into documentation with me at that time, that's right.

JOANNE FINLAY: David Holmes agrees that it was he who suggested the possibility of a Swiss loan to his bank manager. He also agreed that he signed a document in which he said that the bank had alerted him to the risks. But he says that in hindsight he believed that the bank knew more about the risks than he was told. And, he says, he was not a speculator but a farmer, and as such he should never have been allowed a loan in the first place. Farmers, he said, spend their days on tractors and not on the telephone talking to their foreign exchange dealer.

DAVID HOLMES: The bank did inform me in the original taking out of the loan that there were risks involved with foreign currencies. They did that. But I don't think that they fully informed me as to the extent of what was the average blowout in a Swiss loan. They obviously had those facts. They knew what the difference between taking out a loan and the paying back of a loan had been for previous borrowers. And I feel that I wasn't informed of that.

JOANNE FINLAY: This was the public face of the rural downturn. Farmers unable to repay their banks were evicted and their properties were sold. The sale of David Holmes' farm never received this sort of publicity. He returned to the city to work, and he paid someone else to look after his property. Last month his farm was sold.

DAVID HOLMES: We've been able to just discharge our debts. But of course we've come back to Sydney where housing prices have just blown out of all proportion. So we're paying rent, we're living in a unit, and we will start rebuilding our lives from there.

JOANNE FINLAY: Across the country hundreds of borrowers are now facing the day of reckoning. The loans were taken out over five years, and that means that for many the principal is due to be paid out this year or next.

In Taree about 30 borrowers took out loans in Swiss currency, among them property developers, solicitors and farmers. Many of them are now in litigation; some have had to sell up their properties; and still others are waiting, hoping for a settlement. The trouble is that they don't want to talk out, and that is because they simply can't afford to put their banks offside.

ALLAN: At this stage of the development in my loan, I feel that it may prejudice any future dealings that I have with the bank.

JOANNE FINLAY: Allan, as we shall call him, is scared of being identified, because he fears that his bank may try to sell up his parents' farm on the mid north coast of New South Wales. The farm was used as security for a $450,000 loan in Swiss francs. Allan used the money to finance a property development in town. He didn't know it then, but at the time that Allan took out his loan, other businessmen in Taree were already in trouble. The dollar had started to drop, and their Swiss currency loans had begun to blow out. Like other currency borrowers, Allan arranged his loan through a loans officer from the local branch of his bank.

ALLAN: Well, he said words to the effect of, you know, it was the only way to go at that particular time. You know, sort of the greatest thing since sliced bread, basically.

JOANNE FINLAY: At the time that you took out the loan, the Australian dollar had already declined against the Swiss franc. Did you know that, and were you concerned?

ALLAN: I did know it; yes, I was concerned about it. But the bank officers that I was dealing with felt that the dollar wouldn't probably go down much lower.

JOANNE FINLAY: So the loans officer advised you that, in his view, the Australian dollar wasn't going to fall any further against the Swiss franc?

ALLAN: Basically yes, that's true, yes.

JOANNE FINLAY: It was not until the size of Allan's loan had more than doubled that the bank suggested he should speak to experts from its head office.

ALLAN: And I did speak to some of their experts. But basically I was at a loss to know what to do, even with their advice.

JOANNE FINLAY: When was this?

ALLAN: This was about 16 months after I had drawn the loan down.

JOANNE FINLAY: it is standard practice for foreign currency borrowers to attempt to minimise their exposure to currency fluctuations. Buying across currencies and hedging are two options. Neither Allan nor David Holmes took such action initially, and from Countrywide's investigations, it seems that many other borrowers also did not take action early on to protect their loans. The whole issue raises the question of where does a borrower's responsibility begin and a bank's end?

ALLAN: The whole business of currency movements was sort of glossed over fairly quickly. They just sort of said, you know, the currencies can go either way and, you know, you can make a loss, sort of thing, basically that quickly. So I don't feel I was fully informed of the consequences of the loans.

JOANNE FINLAY: Allan now works 16 hours a day, six days a week. His repayments total $1,700 every quarter.

JOHN TERESEY: The crux of the whole issue is the banks were, we believe, negligent.

JOANNE FINLAY: John Teresey is spokesperson for a recently formed support group, the Foreign Currency Borrowers Association.

JOHN TERESEY: I know from practically every single person that I've spoken to, when the dollar began to fall they went to their banks and they said: what do we do? And the banks' advice, in the main, was: don't worry, the dollar goes up, the dollar goes down. Now, this was wrong, it was negligent, and it's an insult to people's intelligence, with the benefit of hindsight.

JOANNE FINLAY: The Association is now determined to tackle the banks in the media and in the courts.

JOHN TERESEY: The interest in this case is we're hoping it will achieve a landmark decision.

JOANNE FINLAY: This was the first day of hearing in the New South Wales Supreme Court of legal action taken by a solicitor, Charles Spice, against Westpac.

JOHN TERESEY: There's been a lot of work put into this court case, and we're hoping that it will be resolved, favourably to the borrower, and set the standard for the other cases to follow.

JOANNE FINLAY: Association members had already met with Spice's lawyers. They attended the hearing as a show of force. The significance of the Spice case for breaking new ground emerged on day one - bank documents were tabled in which it was alleged that Westpac executives knew in early 1985 that the dollar was set to plunge. Charles Spice drew down his loan for $800,000 in March of 1985, and his counsel submitted that the bank had not given him all the proper warnings. Charles Spice's loan later blew out to $1.6 million.

Spice's case against Westpac is being fought on three main grounds - negligence, product liability and duty of care. Unlike many cases before it, this one has not been settled on the steps of the court. If it is found that Westpac did breach its duty of care to a client, John Teresey believes that that could open the floodgates.

JOHN TERESEY: We believe a duty of care argument, once it was won by a borrower, then hundreds of other cases would follow suit, yes, sure.

JOANNE FINLAY: For their part the banks are arguing a very different scenario. The Australian Bankers' Association says that the borrowers were people with substantial assets and, as such, they should have realised that there was a down side to taking out cheap loans. He said that the banks were under no obligation to inform borrowers of the risks, but it was standard practice for them to have done so. As to the extent of that risk, well, the spokesman said that it was not possible for the banks to estimate that because the fall in the dollar was unprecedented.

Regardless of the rights and wrongs in this issue, a court decision could settle the debate over exactly where a bank's responsibility begins and ends. There was a time when borrowers believed that their banks would look after them. That's certainly what Allan believed until he became embroiled in the Swiss loans scandal.

ALLAN: Probably like a lot of other people. I felt that the banks knew what they were doing and, you know, that they could be trusted in giving you the right advice.

DAVID HOLMES: I've felt more than hurt towards the bank, but at this stage I have not been in a position to take legal action, because I just don't have the money to fight the banks. And if I was to lose that case, then I'd find myself in an even worse situation than I am now.