Confecting cataclysms to score political points
“Cataclysmic”. We all know what it means, don’t we? Don’t we?
According to yet another breathless front-page report in The Australian Financial Review yesterday, Australia is on the same path as Spain according to ratings agency Standard and Poor’s. How so? Is our unemployment at 25%? Are we unable to raise capital in international markets except at an exorbitant price? Is our social fabric starting to tear under the demands of austerity?
Well no. S&P reckons Australia risks losing its AAA credit rating if it is unable to get its federal budget back to surplus by 2014. As reported by the AFR, the global director of public finance at Standard & Poor’s Financial Services, Kyran Curry, (who used to be in Australia as S&P’s primary credit analyst for Australia and recently moved to London) says there are similarities between Australia’s relatively indebted banking system and Spain’s position before it began its rapid descent into its debt crisis. Curry is reported as saying:
“For Australia, it comes back to the government restoring its fiscal position as conditions allow and there won’t be significant pressure on the ratings unless something cataclysmic happens and the government is unable to return its balance to surplus this year or next.
“If there’s a sustained delay in returning the balance to surplus, as the economy gathers momentum and as people start spending again, as the import demand picks up and current account blows out, we might not see the government’s fiscal position as being strong enough to offset weaknesses on the external side and that’s what worries us.
“Australia’s already, as we see it, got some credit metrics that are right off the scale when it comes to assessing Australia’s external position. It’s got high levels of external liabilities, it’s got very weak external liquidity and that basically means the banks are very highly indebted compared to their peers.”
Now, Curry has changed his tune. Back in June, he was declaring it wouldn’t matter if there was a delay of a couple of years in returning to surplus. Still, consistency, small minds, etc.
Note the word “cataclysmic”. This is another bite at that decidedly rotten old apple that former Future Fund head, David Murray, has already publicly drooled over, to loud applause from The AFR and other media (Business Spectator and The Australian) earlier in the year.
The theory is, in the event of a major global downturn — the said “cataclysm” — the government would have to provide major support to our banks to save them, thereby plunging the budget deep, deep into the red. European-style red.
We’ve smacked this stupidity down a couple of times already this year, including in September when we noted that the IMF had explicitly considered, and rejected, the theory. Perhaps Curry is somehow channelling the geniuses at Variant Perception, who got a run in Fairfax in August with the same rubbish.
Curry’s comments were naturally music to the prejudices of some financial blogs, such as Macrobusiness. That blog — author unrevealed — skipped the entire paragraph referring to a cataclysm and simply started its quote with the words: “If there’s a sustained delay in returning the balance to surplus …” It misstates what Curry actually said and misses the point that, even if we reject the IMF’s conclusions, the warning is predicated on a major downturn or financial catastrophe occurring.
And if that happens, then we’ll all be in the toilet, and our credit rating will probably be the last thing on our minds as we race to protect jobs, retirement savings and the banking system.
And as the likes of The AFR and Macrobusiness forget, Australia has already been through such an event in the GFC in late 2008 and 2009, and survived. Our banks now have more capital and a more stable funding base than they had then. This week the Basel 3 capital requirements were signed off and will come into force from 2013, while the US has postponed their introduction there to a date well past January 1 next year.
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