The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
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Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

30 September 2008

Interview with Fran Kelly

ABC Radio National Breakfast

30 September 2008

SUBJECTS: US Financial Crisis; Australian Economy; Residential Mortgage-Backed Securities; Paid Maternity Leave

KELLY:

Treasurer, good morning.

TREASURER:

Good morning, Fran.

KELLY:

Treasurer, a black day on the markets. What's your reaction to this rejection by Congress of the $700 billion bailout plan?

TREASURER:

Fran, I'm certainly disappointed this package was voted down. I certainly hope it could be recommitted later in the week. But I think it's also very important to remember that there's a world of difference between what's going on in the United States and Australia when it comes to the underlying strength of our financial system, and for that matter, the underlying strength of our economy.

KELLY:

We'll get to that in a second. I just wonder, politically, if you can understand at all why some legislators might have voted down the bail-out package, the domestic political pressure there?

TREASURER:

Well, certainly there would be a variety of domestic political pressures but I think with something as important as this, it's the time to put aside party politics, to go back to the fundamentals and what needs to be done. I don't think anyone is happy with how these events came about, the failures in regulation in the United States particularly, and so on. But what we have to deal with now is the practical reality, and the practical reality does demand a very substantial response in the United States which, after all, is the epicentre of all of these problems.

KELLY:

Does it make you nervous, as Treasurer, a 777 point drop in the Dow? That's the largest point drop in history.

TREASURER:

Fran, we've been dealing with the impact of this for some time. The fallout around the world has been with us for many months, and you've seen the impact on stock markets, the impact on confidence around the world. But the thing that I keep going back to is that the strength of the Australian system is in good shape, very good shape, and if there's one country you'd want to be in in the world in these circumstances, it is Australia. But of course, we are not immune from the impact.

KELLY:

What will the impact on the liquidity of our banks, for instance, on our banking system be? It's got to be pretty dire, hasn't it?

TREASURER:

Our regulator is constantly engaged with our banks, constantly engaged to ensure that there is sufficient liquidity in our system. You've got to remember, Fran, it was only last week we had the report from the IMF and we also had the Reserve Bank Financial Stability Review which made the point yet again that our banks are well-capitalised and they are in good shape.

KELLY:

Those same reports, I think it's worth noting, at least one of them suggested inflation would remain high in Australia and that would put the brakes on the Reserve being able to cut interest rates too much.

TREASURER:

Fran, I don't speculate about what the Reserve Bank will do when it comes to interest rates. But as you know, part of the fallout of what's occurring internationally is that it does put upward pressure on borrowing costs. There's no doubt about that. But the Reserve Bank takes its decisions independently. It will do that in a week or so's time, and I'll comment on that at that time.

KELLY:

What about the Reserve Bank in the here and now. I wonder if you've been in touch with the Reserve Bank boss, Glenn Stevens, to see whether the Bank's looking at putting in more cash into the system today.

TREASURER:

I've been in constant contact with our regulators, not just in recent weeks, but the Prime Minister and I all year have been acutely aware about the seriousness of what's been occurring in the United States. Indeed, when the Prime Minister and I were there earlier in the year, around March and April, when we were putting the Budget settings together we were acutely aware that events in the United States have some way to run. And all year we have been working with our regulators, through the Council of Financial Regulators, to put in place all those measures that we think are required to further strengthen the Australian system. And you might recall, Fran, that we took legislative action - the legislation action that underpinned the action I took last Friday in terms of the AOFM. That's all been part and parcel of preparing our system to strengthen it and to make it better in the face of these adverse global circumstances.

KELLY:

And I'll come to that announcement just in a moment. But in terms of our financial system, if it's in good shape, are the Australian banks keeping you well informed about their exposure?

TREASURER:

Our regulators, not just the Reserve Bank but APRA, are in constant contact with all of our depositors-taking institutions. And as I said before, you had the report only last week from the IMF which looked at our banking system and concluded that it was in good shape. The advice that we are receiving from our regulators is that it is in good shape.

KELLY:

What about advice from the US? Do you or the PM have any plans to talk to your counterparts in the US today, following this move in Congress?

TREASURER:

I've been talking to my counterparts not only in the US but also around the world right through this year, as indeed has the Prime Minister. I think that today in the United States those people will be particularly engaged, but we will be having discussions with our counterparts regularly, and that is occurring on a daily basis.

KELLY:

On Friday you announced that $4 billion plan to underpin the non-bank lenders. You're investing in new mortgage-backed securities. Does this Wall Street disaster of the last 12 hours make you reconsider that amount? Should it be more?

TREASURER:

No, Fran. What's happened here is that because of the fallout from what's been going on particularly in global markets, it has been harder for some of the smaller banks and the non-deposit-taking institutions to access finance in international markets. That's why this measure was necessary. We think it will inject a degree of liquidity, as well as confidence, into that market.

KELLY:

With that liquidity and confidence how soon do you expect that the non-bank lenders and the smaller banks will be easing that credit pressure and giving out those affordable loans again?

TREASURER:

The Treasury is engaged very directly. It has been since first thing yesterday morning putting this together and putting together the tender process. We're going to do this as quickly as we possibly can. But this is a competition measure, Fran. It's a measure just to make sure that those offerers of mortgages out there have got secure access to finance so that we can have some real competition in the banking market with the big four.

KELLY:

How competitive do you think the big four are at the moment? The average mortgage rate is around 9.5 per cent. To be competitive the rates funded by the government investment, if you like, would need to undercut that, wouldn't it?

TREASURER:

I'm not going to go through the commercial dealings of those institutions that are going to put in for the tender. But this will increase competition in the market. The big four have done very well in recent times, and you'll see that noted in the Reserve Bank's report from last week. We think it's really important in this environment to have a competitive market which is why we took the decision that we did last week.

KELLY:

So, competitive means it's going to have to be less, the interest rate coming from these non-bank lenders.

TREASURER:

Well, certainly it means it will put a lot more pressure on the big four.

KELLY:

And that comes at the same time, I suppose, as the big four and all the banks are finding it more expensive now to get money. So, you can't really expect, the pressure's going to be on them not to cut rates.

TREASURER:

There's no doubt that events in the United States will probably put further upward pressure on borrowings, but we'll just have to wait and see. Everybody hopes that over time this package is put together and the system settles down.

KELLY:

Treasurer, can we go to the Productivity Commission report on maternity leave released yesterday? It's recommended 18 weeks paid maternity leave to be funded by the Government. Can we afford it at a time like this?

TREASURER:

Well, certainly it's time, I think Fran, that we did bite the bullet when it came to paid maternity leave. It does come at a substantial cost but it also brings to the economy over time very substantial benefits. When you go to the very core of the challenges we face as a nation, labour force participation is very important and providing family friendly means by which particularly second income earners can move in and out of the labour market and still achieve their hopes and aspirations for the family is very important. So, I think paid maternity leave is not only an important factor in lifting labour force participation but it ensures that our families are healthy, because if a young mum can take a bit more time off work to bond with the child, that's a very good thing for the family. It's a very good thing for the nation.

KELLY:

Sounds like it's a dead cert for the next Budget then.

TREASURER:

Well, I wouldn't be absolutely punting on it being a dead cert for the next Budget because the one thing we've put absolute emphasis on from day one is strong and responsible economic management and of course, the events unfolding internationally underscore the continuing need for strong and responsible economic management. I happen to think that paid maternity leave is a very essential ingredient in delivering labour force participation which is important to underscoring, once again, the strength of our economy. But I'm not going to make any absolute commitment to funding in the next Budget.

KELLY:

Well, just on the design of any scheme, Tony Abbott has pointed out that the scheme proposed would disadvantage stay-at-home parents. He said it would create first and second class mums because stay-at-home mums would be paid less than mothers who've been in the workforce. He has a point, doesn't he?

TREASURER:

I think what Tony Abbott has to understand is that most women who are having children are at various stages in and out of the workforce. The system isn't as clear cut as that. Certainly we ought to be providing substantial support to those that choose to stay home. But those that can't make the choice to stay home and have to go back into the workforce, although they might prefer to stay at home, are certainly deserving of an initiative like paid maternity leave, because if it's not available we get the worst outcome for the country. They're not able to stay home, they're not able to bond with the child. What we need is a system which recognises the reality of modern family life where most women move in and out of the workforce during their child-rearing years.

KELLY:

Wayne Swan, thanks very much for joining us on breakfast.

TREASURER:

Good to be with you.