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Wednesday, 1 November 2000
Page: 21877

Mr COX (4:31 PM) —by leave—The report by the Auditor-General on Commonwealth debt management is one of the most damning I have seen him hand down while I have been Deputy Chair of the Joint Committee of Public Accounts and Audit. The report has revealed that the Treasury's strategy for reducing the public debt interest costs through the use of interest rate and cross-currency swaps has been compromised by the failure of this Treasurer's macro-economic management. Treasury has been involved in these types of transactions for more than 12 years, since the Commonwealth ceased its former practice of borrowing overseas. Between May 1998 and June 1999, the Treasury entered into 332 swaps with a notional value of around $38 billion. The Auditor notes that in 1995-96 the realised gain from those swaps was $1.33 billion. The government changed and the fortune of the swaps portfolio changed with it.

In his report the Auditor notes on page 16 that the 1997-98 result was a loss of $1.97 billion. The Auditor does not say why he published the specific gain and loss figures for those financial years, but there they are and you can draw your own conclusions. On page 18, the Auditor notes that, as of 30 June 1999, the market value of the swaps portfolio was estimated to involve an unrealised loss of $1.297 billion. It is certain, if the Commonwealth has maintained its exposure in that area, that with a substantial devaluation of the Australian dollar the unrealised loss on the portfolio will have increased substantially since then. The cause of these losses is of course the devaluation of the exchange rate from US77.93c in March 1996—the month in which the government changed—to a new historic low yesterday of 51.1c. This is of course not the only period in which the dollar has been low in the period of this Treasurer's stewardship. As the Auditor notes on page 57, the dollar had reached a previous post-float low of 55.3c in August 1998.

I spoke last night on the adjournment of the Treasurer's non-performance on management of Australia's external accounts, and I will not repeat that. However, it is important to note in the context of tabling this report that Commonwealth debt management is an area where the low exchange rate is costing Australia dearly. I will put a question on the Notice Paper asking the Treasurer for an accurate assessment of the losses on these swap transactions as of 31 October 2000—the day when the Aussie dollar reached its latest historic low. It is also important to point out that the Treasurer is not just some passive victim of this unfortunate turn of events. The Treasurer, of course, has ministerial responsibility for the administration of the Commonwealth's debt management program. As the Auditor notes on page 19 of his report, the Treasurer provided annual endorsement of the annual swaps strategy. Those strategies included a stated objective to have between 10 and 15 per cent of the market value of the portfolio denominated in US dollars. The Auditor also notes on page 20 that the departure of the debt portfolio from the mid-point of the benchmark target ranges between 2 July 1997 and 1 July 1998, resulting in additional debt costs of $362 million relative to the benchmark.

I am not of the view that Treasury should behave like a market player and change positions on a daily or hourly basis to maximise the Commonwealth's position. Given the size of the Commonwealth's debt portfolio and the way the market operates, that kind of activity would quickly become obvious to the rest of the market and be interpreted as signalling the Commonwealth's view about future interest and exchange rates. That would compromise the conduct of monetary policy and have wider implications for macro-economic management. For that reason the Commonwealth is not a normal player in the market. It must set a benchmark position and stick to it with infrequent periodic reviews. However, it seems incredible that, given the poor performance of the dollar over such a lengthy period, this government's first review of the benchmark is happening only now. The JCPAA felt constrained in making recommendations to await the outcome of that review. I can only say here that, in the light of the poor performance since March 1996, that review should be as wide as possible, including the desirability of maintaining the swap program.