Nov 16, 2012

Confecting cataclysms to score political points

The same myths keep getting peddled by critics of the Australian economy desperate to find something to bag the government for, write Crikey's Glenn Dyer and Bernard Keane.

"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. Nor is there mention of the low level of government debt, nor any recognition that Australia's foreign debt is overwhelmingly held by private companies, which include the banks, and the likes of BHP Billiton, Rio Tinto, Caltex Australia and a multitude of other companies. if they have financial problems and can't meet their debts, that's matter for themselves and their creditors, and not the Australian government. And can someone please explain to The AFR and other experts that if events conspire to produce a set of circumstances that sees Australia losing its AAA credit rating, then two things will happen. The first is that the Australian dollar will fall significantly, producing relief across the moaning and groaning Australian business class, just as it did in 2008 and 2009. Secondly, The AFR will struggle to survive in its current form given its struggles to find advertising revenue and the precarious state of the finances of its owners, Fairfax Media. This is not to argue that Australia's finances are 100% sound and unimpeachable, like all economies we have strong points and weaknesses. But there's a desperate need on the part of the national newspapers and some economic commentators to conjure crises that aren't there, warn of dangers that are of negligible likelihood and, in essence, say anything they can to distract from the fact that a government they dislike is presiding over a robust economy when most of the developed world is struggling; indeed, we've become the 12th largest economy on its watch. And if the message is that the government needs to do anything necessary to get the economy back to surplus next year no matter what happens internationally, well, look at the eurozone, which overnight was confirmed as being back in recession courtesy of pro-cyclical austerity policies that have caused untold misery. If there's a lesson from Spain we should learn, that's the one.

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One thought on “Confecting cataclysms to score political points

  1. Dogs breakfast

    No doubt about it, Australia is in a terrible position.

    Except in comparison to every other country on planet earth.

    There seems to me to be one, maybe two glaring weaknesses that may or may not do us in. One is the huge cost of housing in capital cities and the fact that everyone is mortgaged to the hilt, and the corollary that the banks would be left with a lot of worthless mortgages in the case of a serious downturn, and therefore the banks would be bailed out of their stupid positions by the taxpayer – as per so many countries.

    The second is that we never seem to have a current account surplus. I pray that the largely private sector debt has been well used and is sustainably being paid off. One day I would hope that the country actually makes an international dollar or two.

    The plus side is that somewhere, I don’t know exactly where, we have trillions of dollars in superannuation squirrelled away.

    Blimey, one looks like a solution to the other, doesn’t it. Must be one of those ‘simple answers to a complex problem that is elegant, neat, and wrong’.

    Either way, if Australia is struggling with a AAA rating then it is high time that the debt rating system was abandoned as a bad joke.

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