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

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

29 October 2008

Interview with Philip Clark

Radio 2UE, Sydney

29 October 2008

SUBJECTS: Deposit guarantee, Malcolm Turnbull personal fund withdrawal, Treasury climate change modelling

CLARK:

Mr Swan, good afternoon to you.

TREASURER:

It’s good to be with you Philip.

CLARK:

Yes, well look these are troubled times. Now that the Government has refused essentially to help directly retirees and other investors in mortgage and investment funds that have had those funds frozen, what do you say to those who were relying on them for living expenses or nursing home fees and such stuff?

TREASURER:

Well, first of all, Philip, we haven’t said that we’ve refused to help. We are looking at a variety of responses to the issues that are being raised with us by the managed investment funds industry. It is the case that some of those out there in that industry may wish to become a deposit-taking institution. That’s one of the reasons why we have beefed up funding substantially for our regulators. But there are a variety of other issues that have been raised by the industry with our regulators and directly with the Government, and we are working on all of those issues. But we must bear this in mind: yes, redemptions from some funds have been frozen, and that has certainly put people in a very difficult situation, but at this stage many people out there are still receiving distributions from the funds.

CLARK:

Yeah, but there are plenty who also need the capital redemptions for living expenses as well. I’ve spoken to them here-

TREASURER:

Yes, they certainly do, but because these are market-linked investments, we can’t provide a guarantee like we have provided for the banks which are regulated by APRA. But we are looking at what can be done when it comes to the hardship provisions to assist those people, and we are working through that issue with the industry as we speak.

CLARK:

You’re not seriously suggesting these people line up at Centrelink, are you?

TREASURER:

No and I wasn’t suggesting that before either. But there may be some people out there who have been on the receiving end of a really tough decision, and they have no resources at all, and certainly that would be an option for those people in some circumstances. But I wasn’t suggesting that a few days ago. I’m not suggesting that now.

CLARK:

You don’t seriously think that most of these funds anyway will be applying for bank status, do you? They don’t have the funds that a bank would be required to have to stand behind the mortgages and other investments that they have. They simply would fail to meet prudential standards as they presently are structured. They can’t apply.

TREASURER:

Well, Philip, some have suggested that they will apply, and we are providing extra resources not just for that, but also, given the scope of the challenge that has been brought upon us in these circumstances.  There has been a massive fallout from the global financial crisis in terms of the share market, in terms of credit markets, so it’s very important that our regulators have additional resources. But some of those funds have indicated to us they want to proceed in that direction, but there are other courses of action that we are working on in conjunction with the industry.

CLARK:

In hindsight, do you think that the blanket unlimited bank guarantee that was issued three weekends ago was too much and ill-thought out given the problems it’s now caused? Now, I’m aware the wisdom of hindsight is a wonderful thing, but given that hindsight, was it ill-thought out?

TREASURER:

It most certainly was not. It was the advice of all of our regulators – the advice of the Reserve Bank, the advice of the Treasury, and the advice of APRA – and it was absolutely essential for the stability of our financial system. Absolutely essential. Of course, there are knock-on consequences, but when we are dealing with these market-linked investment funds, there are other factors involved here. Ten of those funds had suspended their redemptions before that decision was taken, so there are wider economic forces at work here in terms of decisions that are being taken by those funds.

CLARK:

But weren’t there models to look at - Ireland in particular - where these blanket guarantees had caused problems? Wasn’t there advice to you that this wasn’t the first time in the world that it had been tried, and these are the issues you’ll face if you do it?

TREASURER:

Philip, I made very clear in my speech in the House when I introduced the Bill that there were consequences elsewhere, particularly in the short-term money market. I flagged then that adjustments would be made as we move forward. But there was absolutely no alternative but to guarantee deposits of banks and to guarantee their term funding if we were to maintain that essential stability in our economy.

CLARK:

But the guarantee of course is a massive market intervention, obviously by definition, and it has distorted the market substantially. Doesn’t it have the effect of basically killing off the investment funds management industry? Maybe we don’t care about it, but there’s a clear division now between which funds are guaranteed – ie. banks – and which are not – that’s the rest. Are we going back to the good old days when basically all the money will be held in bank deposits, and do you care about the demise of much of this investment fund industry anyway?

TREASURER:

Well, many people have invested in this industry, and they invested in the industry on good advice. Many of these funds have a high reputation. But they are being affected by global factors which are well beyond the bank guarantee. Insofar as there are issues which the industry wants to raise with the Government, we are prepared to look at all of those issues that they are raising.

But we are certainly not going to put taxpayers dollars on the line for market-linked investments, which are entirely different from deposits. But guaranteeing the banking system was absolutely fundamental to guaranteeing economic stability in this country. Yes, there have been some flow-on consequences, but the consequences of not acting when we acted would have been far greater than anything the country is dealing with at the moment.

CLARK:

But do you acknowledge that it will have this effect? That basically the investment funds management industry will essentially disappear or certainly vastly contract in size as a result of the guarantee?

TREASURER:

Well, there will be an impact, but it is not an impact that flows primarily from the guarantee. It flows from a combination of a whole set of factors. That’s why we’re talking to the industry to manage the impact of the global financial crisis and the guarantee. We anticipated that there would be impacts, which is why I announced the package last Friday, and we are working with the industry right around the clock on all of the issues that they are raising.

CLARK:

Mr Turnbull says that the compulsory deposit tax, essentially this is the guarantee, will have the effect of pushing up interest rates. What do you say?

TREASURER:

Well, I think Mr Turnbull should stop talking down the economy. He should really put the national interest before his self-interest, because from day one, despite calling for bipartisanship, he has been out there trashing the bank guarantee and talking down the economy. Frankly, I think the country can do without that reckless behaviour from Mr Turnbull.

CLARK:

Mr Turnbull moved his funds out of one mortgage fund before the freeze came in. Do we wish that we had the prescience that he had?

TREASURER:

Well, Mr Turnbull on the one hand was saying the global financial crisis was over-hyped, and on the other hand, he was moving his own funds out of the system. That tells you something about Mr Turnbull’s double standards.

CLARK:

Do you share Lindsay Tanner’s view – I spoke to him yesterday – that the worst of the banking crisis is over? He says in relation to inter-bank lending that things are becoming freer, that we’ve seen the worst of it?

TREASURER:

Well, I think we’ve got to go back to the original decision and look at what has happened, because credit has been flowing in the system as a result of the guarantee. In fact, you’ve seen an impact on interest rates. They have been coming down. So, there have been substantial beneficial impacts of the guarantee. But look, it’s a rocky road ahead. This global financial crisis changed its face some weeks ago. It turned ugly. It is having dramatic impacts on real economies around the world. But I’ll tell you this, Philip, if there’s one country you’d want to be in in this environment, it is still Australia.

CLARK:

I note the Treasury modelling for climate change is due out I think tomorrow. It’s going to suggest that carbon taxes won’t force industries such as oil refineries to up stakes and leave the country. Do you share that view?

TREASURER:

Well, I think what the modelling will show is that we can deal with climate change.  We can put in place a Carbon Pollution Reduction Scheme, without having a dramatic impact on economic growth, and indeed we can prepare ourselves for the jobs of the future and get ahead of the game when it comes to the impact of this issue internationally.

CLARK:

Just finally, unlike Julie Bishop, your opposition counterpart, can you guarantee that all recent articles submitted for publication by you are all your own work?

TREASURER:

What I can guarantee is that we will pursue strong economic policies and we won’t be copying them from somebody else.

CLARK:

Alright. Treasurer, good to talk with you. Thank you.

TREASURER:

Thank you.