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Parliament House, Canberra: transcript of media conference: currency swaps.

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Subject: Currency swaps

MCMULLAN: Thanks very much for coming. This is a very difficult time to be pursuing this very important issue. Anything such as the loss of $1 billion of taxpayers’ money, which is reported in The Bulletin this morning, would in the normal circumstances in any democracy be the subject of very vigorous, robust scrutiny. But today, in the context of the Bali terrorist attack, we recognise that, while the loss of $1 billion of taxpayers’ money is much too important to ignore, it will have to be pursued with some restraint. But nevertheless, it is too big to ignore, and we intend therefore to raise some questions about it, and this is the first indication of that.

For those of you that haven’t been following the issue, let me briefly give you some background. In February and March, through Senator Conroy in the Estimates Committee, and through examination of the reports of the Australian Office of Financial Management, the Opposition established that approximately $5 billion of losses had occurred on currency swaps since 1997. The Treasurer at that time, in February, insisted that there were no realised losses. While it was clear to us at that time that that couldn’t be true, we couldn’t prove that it wasn’t true then. But we can now. That is what that document, the answer to a question on notice -- which looks a bit arcane but is actually quite straight forward in its essence --establishes. In the answer to the question on notice, it says that the swaps which matured in the last financial year had, in the jargon of the industry, $1.7 billion Australian receivable and $1.4 billion US payable. What does that mean in English? It means that at the exchange rate at the time, we got in $1.7 billion; we had to pay out $2.7 billion. This is not rocket science. This is arithmetic. We lost $1 billion. So there are some very important questions that need to be answered with regard to this. We need to know when the Treasurer first became aware of these realised losses. It is extraordinary to us that in a year in which 14 swaps matured over a 12 month period that almost nine months into that financial year the Treasurer could assert


there had been no realised losses. That is an extraordinary proposition. So we want to know when he first became aware there were realised losses, why he didn’t correct the public record, as the Government’s Ministerial Code of Conduct requires, and why these losses weren’t publicly reported. The accounting standards would require any private sector agency to disclose these losses. The public sector accounting standards give governments an option about whether they disclose it above the line in the Budget or not. The Government chose not to disclose it.

So, the essence of this issue -- behind the scenes it is very complex --in its essence it is very simple. In the course of financial year 2001/2002 the banks got $1 billion of the taxpayer’s money, and there is more to come. This financial year, there will be more, and these losses will continue for some years to come. So, that is all I want to say in opening. We are happy to answer your questions.

JOURNALIST: These losses will continue for some years to come if the exchange rate remains where it is?

MCMULLAN: Correct. Let me then be more specific. It is clear there will be more losses this financial year. It is likely there will be losses into future years, but of course the currency could appreciate very strongly and then there wouldn’t be losses - although it is unlikely there would be gains.

JOURNALIST: Have you got a best guess on what will transpire this year?

MCMULLAN: It is like extracting teeth. The reason Senator Conroy can get some information is that when we put questions on notice in the Senate, they have to be answered. When you ask the Treasurer questions in the House, they don’t. Questions on notice in the House to the Treasurer never get answered. So we slowly are extracting more information and as we get it we will release it.

CONROY: We need to find out how many contracts mature this financial year. That is the key there, and then we can make a calculation. But at this stage they haven’t given us that information. We have had to, as Bob says, drag that out of them. We asked these questions back in I think June and it has taken until only the last few days for us to get the information.

JOURNALIST: And because they are not required to put this on the Budget bottom line, that is the point isn’t it? Can you say that as a government you would volunteer this information, this is basically what it is?


MCMULLAN: Yes, unquestionably. There are two things about that. One is, that the reported deficit last year of $1.3 billion was, properly reported, a real deficit of $2.3 billion. And I can absolutely say to you that if we are elected at the next election, these financial transactions will be reported in the public sector as they are required to be reported in the private sector and reflected in the Budget.

JOURNALIST: What about the fact that the policy of currency swaps began under and, as Oakes says here, there was no clear-cut expert advice to Costello that he should have got out? When should he have got out?

CONROY: That’s Costello’s view. We have argued consistently, there was a UBS Warburg recommendation in one of the reports they [Treasury] commissioned, that recommended a different structural handling of the portfolio - that it should have been split, and that not as much of it should have been hanging in the market as it was. That was a 1998 report from Warburg, which they have released and which we previously released. And so we disagree with Costello that he didn’t receive any advice. There was a quite clear recommendation that would have reduced the risk. But the key element is that when Labor managed it, we made $2 billion. When they took over, there was a shift in economic circumstances, the interest rate differential with the US closed, and the dollar started to slide. That was the time to start looking at it, saying, ‘what are the implications if this trend isn’t reversed?’

JOURNALIST: So, in 1998/1999 they should have got out?

CONROY: They should have started asking serious questions and should have started looking at closing out their position.

MCMULLAN: It was actually 1997, I think. The significant changes -- not surprisingly, because of what was happening in the Asian currency situation -- the relative value of the Australian dollar significantly changed in 1997, and a responsible economic manager would have reviewed foreign currency exposure when the value of the dollar changed. If you are a corporate treasurer and the board said to you: ‘what review did you make when the currency fell’, and he said ‘I didn’t do anything’, I think the board would look for a new corporate treasurer.

JOURNALIST: Can we afford to blow $1 billion?

MCMULLAN: No. There are an extraordinary number of very important things that could be funded with $1 billion. And that is a very important question, because while it doesn’t appear on the Budget bottom line, it is still a $1 billion that we would have had to fund worthwhile public purposes that we haven’t got.


JOURNALIST: How do you fix the problem now?

MCMULLAN: Well, the Treasurer has stopped the process of issuing new swaps, and we will slowly work our way out of this problem. But the real crisis is this failure to act between 1997 and when it was all publicly exposed in 2001. One of the significantly things about this loss of $1 billion is the number of times the Government has proposed new taxes in recent times to raise relatively small amounts of money, all of which could have been funded with the billion dollars that Peter Costello has lost.

JOURNALIST: Does this have any implications for Treasury’s desire to have a large equity portfolio with the proceeds of Telstra?

MCMULLAN: Well, it certainly raises some questions about who would manage such a currency portfolio because in the normal course of events you would expect the people who managed it to be the people who managed these currency swaps. But we are waiting for the Treasurer to release a paper about that and we will have some comments to say about that at the time.

JOURNALIST: So, will you be putting this to Costello today in the House?

MCMULLAN: Well, in the normal course we would, but our Tactics Committee is considering the extent to which we can pursue it in the House in the context of a number of issues we have to pursue. Bali will be our priority. If, having pursued that in the manner that we think reflects public requirements, we have the opportunity, we will pursue it. We would wish to, and I intend to certainly have something to say about it in the Parliament, but Question Time tactics will be driven by Bali, and this will be secondary.

Normally we would throw ourselves open to questions about lots of other things but I hope you appreciate today we are not wanting to traverse other economic or related issues. It is only because of the extraordinary nature of this that we have dealt with it. So, I am not trying to close it off if you have got more questions about this, but I don’t want to pursue other matters.

JOURNALIST: The answer to the question on notice, that was a Senate question?

MCMULLAN: Yes, asked by Stephen in the Estimates, and they took it on notice and came back. As you can see, he asked it in June, and it came back -- last week? CONROY: A week or so. END