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Monday, 15 June 2009
Page: 5882


Mr TURNBULL (Leader of the Opposition) (2:15 PM) —My question is to the Prime Minister. I refer to the Commonwealth Bank’s claim that its recent rate rise was caused by an increase in its own long-term wholesale borrowing costs. Given the increase in long-term rates is directly related to the massive explosion in government debt, doesn’t the Prime Minister accept that it is his reckless spending and debt binge which is pushing up interest rates?


Mr RUDD (Prime Minister) —I thank the Leader of the Opposition for his question. Let’s go to the facts of what the Commonwealth Bank actually said. They said:

The cheaper funding we had … prior to the crisis is rolling off and is being replaced by this more expensive source of funding.

The cost of raising funds from offshore wholesale markets was still 12 times higher than it was before the credit crisis.

That is: offshore.


Mr Hockey interjecting


Mr RUDD —Let me go to the issue of offshore wholesale markets. Firstly, the cost of bank finance, as the member for North Sydney would be aware, is set in offshore global markets. Presently, in offshore bond markets we have something like $84 trillion on issue. The fraction of that which the Australian bond market, the Australian debt market, issues is 0.001. That is fact 1. Let us just put that into some context.

Secondly, the honourable member asks about the impact of Australian government actions in relation to rates. Can I say that one of the principal decisions taken by the government, for which we were criticised by many of those opposite, was the decision to provide a guarantee on interbank lending in the wholesale finance market to banks.

I would draw the honourable member’s attention to the following. On 12 December 2008 the CBA issued guaranteed bonds at a total price, including the 70 basis point guarantee price, of 160 basis points above the bank bill swap rate. As of 14 April 2009—that is, after the government’s guarantee came into operation—the spread on the CBA issue was down to 123 basis points. In fact, if you look more broadly at the impact on money market spreads as a consequence of the government’s direct intervention in the marketplace to support banks with the interbank guarantee, it runs as follows: following the collapse of Lehman Brothers the spread increased to 142 basis points; after the government introduced the guarantees credit spreads had fallen to 80 basis points by the end of November, to 75 basis points by the end of December, to 34 basis points by the end of March and to 21 basis points by the end of May. I would suggest that the honourable member reflects on that in terms of the basis of his question as well.

The other thing I would draw to the honourable member’s attention is the relevance of the government’s actions in the marketplace to support the interbank guarantee in terms of the banks actual take-up of this guarantee in their international borrowing. And I would draw the honourable member’s attention to the fact that, in the crisis period of October-November last year, interbank lending effectively collapsed to virtually zero. In fact, the total raisings by Australian banks in November last year were $0.14 billion—that is, practically zero. After we introduced the guarantee—which came into operation, from recollection, Treasurer, in early December—we had those raisings increase to $23 billion, $28 billion, $19 billion, $8 billion et cetera.

But here is the critical point for the benefit of the honourable member who has asked the question: the extent to which the banks have relied upon the guarantee for their actual raisings. In December last year 98 per cent of the overall raisings by the banks were underpinned by the government guarantee; in February it was 93 per cent, in March it was 86 per cent, in April it was 65 per cent and in May it was 53 per cent. In terms of the normalisation of credit markets—that is, assisting banks to raise money offshore—from where we had collapsed to zero in November last year, we have had a restoration to these levels of raisings. Most critically, more then half since then—and, in the early months, practically all—have depended upon the government guarantee, producing the contraction in spreads that I referred to before.

Therefore, I would suggest to the honourable member as to the basis of his question: (1) Australia’s public bond issue represents a fraction of 0.001 of the total bond issue which is alive globally—and it is the global bond market that shapes the offshore financial markets which determine credit price (2) spreads have changed and (3) banks have relied upon the actions of this government.

Finally, I ask the honourable member who has asked this question about interest rates to simply reflect on where interest rates stood under the previous government as opposed to where they stand under this government. Under the previous government we had 10 interest rates rises in a row—a total rise of 250 basis points, costing an average family more than $400 per month—and interest rates were at their highest point in a decade. That is what we inherited. I would contrast that with those opposite in the following way: since the government have been in office families have benefited from six interest rate cuts—a total of 425 basis points—and interest rates are now at their lowest point in more than 50 years, which will save the average family with a $300,000 mortgage around $750 a month, or $9,000 a year. So I suggest to the honourable member that he look at some basic comparisons. Let us look at where the CBA rate stood when the Liberals left office—at 8.55 per cent. Where does it stand today? At 5.74 per cent. That represents a fundamental difference between interest rates as the existed under the previous government and where they exist today.

Therefore, I would suggest to the honourable gentlemen that, when he poses questions like this, he reflect upon (a) interest rate performance under the previous government relative to what is occurring now (b) how interest rates and the cost of capital are actually shaped by offshore credit markets, as underpinned in the correct rendering of the statement by the CBA and (c) the impact that the government guarantee has had on spreads and on the actual uptake of interbank lending courtesy of the government’s provision of that guarantee, which was much criticised.

I will conclude by saying this: as those opposite talk about the impact of the 10 basis point rise by the Commonwealth Bank of Australia, on which point the Treasurer and I and others have reflected the government’s fundamental disappointment, those opposite, and the Leader of the Opposition in particular, should reflect carefully on what he had to say when there was a 25 basis point rise not all that long ago. When interest rates went up in August 2006 by 25 basis points the Leader of the Opposition said at the time, ‘I think the interest rate hike has been overdramatised.’ Furthermore, on the question of interest rates, the Leader of the Opposition has also said much more recently—I think as shadow Treasurer:

Banks are free to price their products as they wish. After all, they are in the business of making profits and, all things being equal, they will charge as much for every product they have on offer as the market will allow them.

That is obviously the philosophy—the free market fundamentalist philosophy—represented by the Leader of the Opposition. He says that that is what occurs out there in interest rate markets. I would suggest that the Leader of the Opposition reflect carefully (a) on what he has said about how interest rate markets operate (b) on the relative performance of interest rate pricing and cost under the government of which he was a part for such a long period of time as compared to what applies now and (c) how actual prices are set.