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Tuesday, 6 September 1983
Page: 428

Mr MOORE(10.10) —I thank the Government Whip and the Leader of the House (Mr Lionel Bowen) for their assistance in the timing of this debate. The purpose of Loan Bill (No. 2) 1983 is to authorise the Government to raise borrowings to meet the deficit resulting from the Budget. I thought that tonight, rather than discuss the matter in a political sense, I might attempt to review the way in which loan raisings are handled in the Australian capital markets. It is worth starting from the point of Keynesian economics, which have been so distorted by politicians over the decades in relation to deficit financing, and the converse of running Budget surpluses in times of high economic activity. All too frequently I have noticed that governments have been very willing to run deficits but have shown a complete disregard for the converse of Keynesian economics-running a surplus in times of high economic activity and reducing national commitments. In so doing governments have been forced into relying on the printing of money or substantial government borrowings. Because of that we now have enormous pressure on the Australian capital market brought about by debt raisings, not only in terms of the Australian Federal Government but also right through the State and local government spheres.

The history of the Australian money market is very brief. I think it is only a matter of 20 years since nine members started the Reserve Bank of Australia as a lender of last resort. Because of the market's remarkably small size the growth in government debt has been terribly significant. The total proposition has been as to how the market could handle the mustering of Australian domestic corporate savings for use by the public sector. This brought about an enormous change in the style of marketing of government securities over those years. The sale of government bonds first took place across the counter of the Commonwealth Bank of Australia acting as agent for the Reserve Bank. There was no limit on the number of bonds, just a fixed interest rate. Because of the position, strength and size of the government sector most of the operators in the short term money market were completely dependent on the bids coming from the Reserve Bank in that sense . So the open-window policy rapidly fell into disregard.

As a consequence, and because of the development of a number of new merchant banks and operators in the area, the tender system which we have today was developed. Because of the sheer size of the approaches made to the market- $1, 000m in May, $1,500m recently and $1,000m before that-we now have a problem as to how the bonds can best be marketed. Are they to be called for in terms of tenders of that size, which possibly only five, six or seven major groups within the Australian capital market today can meet or are we to look at the consequences of some wider application of the tender system? At present, with the substantial approaches that have been made to the market, we note that tenderers have forced the price to a level which is more competitive than the open market would produce. In other words, the smaller number of tenderers have kept their prices at a level which has given them a substantial margin when it comes to the retailing of those Commonwealth bonds on the Australian market. This will inevitably add substantially to the interest cost to the Federal Government. One is dealing in very substantial amounts of money.

I would therefore like to canvass the possibility of studying how we can best approach the market in regard to these sums and get the result which the nation ought to require. Those honourable members who may have an interest in this matter will have noticed that an attempt to sell this quantity of paper requires an understanding of the psychology of the market-place. There is no doubt that the first tender, of $1,000m in May, was well received by the financial markets, which were looking for a lead from the new socialist Government. They were not at all sure what they were going to get. They did not know whether there would be another Whitlam spend-up, grab-bag sort of dish it up policy. Indeed, the approach of a tender of $1,000m did show that the Government would embrace a tight monetary policy and stop the usual slop that was evident in the Whitlam days. That bond issue was taken up with great ease.

As we have gone down the track there has been a tendency on the part of the capital market to look at the proposed tenders and say: 'How much will it be this time? Look at the size of the deficit; how much are we going to dig up? What are the likely competitive positions in relation to it?' In other words, the market asks what commercial demand there will be for money. As the corporate sector at the moment is substantially depleted in its requirements it has been largely out of it but, at the same time, domestic savings have been substantially increased. Savings accounts are up and building society accounts are up. Therefore, it has been necessary and it will be necessary to try to harvest that money. How can this best be done? I suggest to the House that it ought to look at accepting the principle of underwriting. By doing this it would offer the issue to an underwriter who would take it at a fixed amount and would then go to the market and sell it. Honourable members might ask: What is the advantage of that course over going to tender? The advantage lies in the way in which the Telecom bonds or semi-government issues have been handled. They have been taken in an underwritten form and then marketed not just to institutions but right throughout the community. Advertisements have even been placed in the Australian Women's Weekly.

There has been great success in getting the small investor to buy the stock. If the Government is to continue not only this year but also next year, as is quite evident from the Budget Papers, to sell substantial amounts of deficit bonds within the private sector to mop up the savings which will not be used because of the slackness within the corporate sector, I suggest that a very sharp eye be kept on this particular approach. It will be surer, cheaper and far more effective in getting the Australian Government paper around the community, not just to the institutions. It is the community which holds the money because it is the consumer who is not spending money and who is saving money these days. Therefore, I urge the Government to approach this matter with some particular care. It is a matter that needs judgment. It is not possible to handle the Australian capital markets without judgment. It is no good saying that because $ 1,000m went off it is all easy going. It is not; it will require handling.

Finally, I wish to extend my argument. For a long time we have underwritten our overseas loans through a syndicate generally headed by Morgan Stanley or, in recent times, one of the Japanese banks. I urge the Treasury to look more carefully at this procedure and to look at the history of the development the banking systems of some of the smaller countries, financially, over the years. I refer to the Canadians. Canada was in no better position than Australia in the 1950s and 1960s. However, the Canadian Treasury insisted that the domestic underwriters be included in the underwriting syndicates that are taken on to raise Government securities outside the Dominion. As a consequence, there are some very substantial underwriting firms in that country. The firm of Wood Grundy is the one I had in mind. In the 1950s it was no bigger than the average Australian share broker but today it is a significant force in world underwriting. The Australian underwriters ought to be guaranteed a position within the international underwriting syndicates. They should not be sold the line which has so frequently been sold by the major underwriters around the world. They have said to me personally and I have no doubt they have said to many others: 'Of course, if we put in an Australian, who are they going to sell it to?' That is a plausible argument if one happens to be the leader of the syndicate. It is not a plausible argument if the weights are put on the Australian to perform. These days, given the widespread operations of the Australian merchant banks and brokers in London, New York and other places, they are nearly as well positioned-not as well but nearly as well-as some of the established people. Unless Australians are given a go in this context they certainly will never be able to match them in view of the enormous competition that is coming into this country with the foreign banks. I am sure that we all hope to see this achieved. With those few comments, I conclude.