SUBJECTS: Financial crisis, deposit-guarantees, offshore borrowing, budget surplus
ALI MOORE:
The Assistant Treasurer is Chris Bowen. Chris Bowen, good morning.
CHRIS BOWEN:
Good morning Ali.
ALI MOORE:
Look on the one hand you have guaranteed bank deposits, on the other we are facing in the Prime Minister’s words – a new and dangerous phase and the economic equivalent of a national security crisis – the money might be okay in the bank, but what else are we in for?
CHRIS BOWEN:
Well the only thing certain about this international crisis is its fluidity, but the steps we have taken yesterday involve two things: Firstly to boost confidence in Australian financial institutions, we have said for some time that they are very sound, they are well credit rated, they are well capitalised, but we want to ensure that people feel confident and so this is an extra ‘belt and braces’ measure if you like.
And also as you say, guaranteed their borrowings overseas in return for a fee because other countries have done that and when credit is so tight we want to make sure Australian financial institutions compete on a level playing field to get that credit.
So that makes sure that we continue to have credit available here in Australia.
ALI MOORE:
In terms of guaranteeing deposits though in this country is that about building confidence? I mean were you really worried about a run on the banks - or was it more about you were worried that people would take money instead to overseas banks where there was a government guarantee?
CHRIS BOWEN:
Look in all these headlines, with all this speculation it would be natural for people to be concerned. We have said that we have AA-rated banks in Australia; over the twenty AA-rated banks four of them are here in Australia. Our smaller banks are also well rated.
But we do want to ensure that confidence remains strong in our financial institutions, we don’t want to see people panicking. This is just an extra step.
We don’t believe we will ever have to call on this step, we don’t think we will ever actually have to guarantee a deposit. But it is an extra step there just to reassure people that if the worst does happen, their savings are safe.
ALI MOORE:
Chris Bowen, do you acknowledge a small risk but merely by doing this you’re potentially going to lead to a loss of confidence. I said earlier in this program I’m going to do a straw pole. How many people feel better? How many people feel worse? And surely anecdotally in the last 12 hours since this has been announced I’m getting half and half. A lot of people saying gosh I didn’t realise it was that bad.
CHRIS BOWEN:
Well as I say we’re seeing constant headlines, constant updates about how bad the world situation is.
Australia is very well armed but we’re not bullet proof.
Basically, this is just reassuring people that if the worse does happen the Government will be there to protect their deposits. A lot of people assume it’s the case; it’s never been the case that Australian deposits are protected. This will be the first time that it is actually the case but it’s just that extra reassurance that people like. I think most people see it for what it is, which is an extra insurance policy.
ALI MOORE:
I have to ask does the Federal Government and the Treasury have the balance sheet strength for this? I mean you’re talking, I know you’re hoping it will never come to pass that $700 billion in deposits and that’s not counting this guarantees for offshore bank borrowings.
CHRIS BOWEN:
Well look if the worst ever happens and had to guarantee deposits it would almost certainly be only one or two financial institutions, if the entire Australian financial system went under we would have all sorts of problems and this would just be one of the ones we’d meet.
We really don’t expect that to be the case.
Of course these are institutions which are governed by APRA - the Australian Prudential Regulatory Authority - so APRA on a daily basis checks the balance sheets of all our financial institutions and they already even before this announcement, made sure that any steps that need to be taken to ensure the liquidity of our financial institutions are taken.
So this applies to APRA-regulated deposit banking institutions, banks, credit unions and building societies. If they’re not regulated by APRA as all ours are then they won’t be covered, so it really is reassuring people that we have confidence in APRA, that they are doing their job in assuring the liquidity of our financial institutions.
ALI MOORE:
Chris Bowen, when the Prime Minister talks about a new and dangerous phase and he says there will be real consequences for growth and jobs and the future in this country. Can you give people who perhaps don’t have money in the stock market, maybe they’ve got a house but haven’t got a massive mortgage, I mean how is it going to effect the average person who’s not got big stakes in stocks and hasn’t sort of overextended themselves in the mortgage, they’re just sort of trotting along, how are they going to feel it?
CHRIS BOWEN:
What the Prime Minister was pointing out is that you can’t have this sort of shocks in the international financial system without it affecting the real economy. So people cutting back their spending, they’re paying off their debt and only just being a bit more cautious and that means you see a slowdown in economic activities, you see people investing less and being a bit more concerned.
So we’re going to see some slowing and what the Prime Minister is pointing out is that that will affect people in different ways and we need to keep our maximum flexibility that’s why we’ve been so concerned. One of the reasons we’ve been so concerned to keep the surplus high so to make sure that inflation is under control which has been an issue for some time and also to give us the flexibility to deal with issues like that so we can respond if we need to over coming months.
ALI MOORE:
You’re listening to the Assistant Treasurer, Chris Bowen at 19 minutes to nine on 774 ABC Melbourne. Obviously it extends to main street, as they say Chris Bowen, that the issue then becomes whether or not the Government stimulates the economy and there has been talk of using the surplus. How much of the surplus is the Government prepared to spend and then how quickly could any of that really make a difference?
CHRIS BOWEN:
Well the good thing about having a big surplus that we do have is that we do have that flexibility. Now we won’t be rushing into any knee jerk responses to this. We’ll be assessing the economic activity over the coming months, we have a mid year financial statement later in the year where we check revenue.
Of course Government revenue is expected to be effected by all this as well. We’ll need to weigh all that up and will respond accordingly. We went into the election saying we’ll keep the surplus over the cycle and that’s what we’ll do. But we’ll stimulate where necessary and we can do that fairly quickly if we need to, but we’ll be doing that very responsibly and not rushing into a knee jerk response.
ALI MOORE:
Isn’t one way to do that and this is an argument that Michelle Grattan makes in this mornings papers, why not give pensioners a small increase Pensioners don’t save their money they spend it. If it’s just a small increase it doesn’t have to have a detrimental effect on the big review that you’re doing but it would immediately stimulate the economy?
CHRIS BOWEN:
Well obviously I think we’ve said that we’ll deal with this issue when we can but the second point is that if there is a stimulus obviously pensioners will be very high on our list, very high.
ALI MOORE:
So you’re saying its possible that well before the next budget they could get a quick hit?
CHRIS BOWEN:
Well I’m not going to speculate on details, that would be irresponsible but it would come as no revelation to people that pensioners are on the minds of Government.
ALI MOORE:
Can I ask you a personal question. I mean I don’t know, I have no idea about your investment perspective, but are you changing what you’re doing in the family? Are you readjusting things or sitting tight?
CHRIS BOWEN:
Well as a family with two kids and a Sydney mortgage a lot of the money is not able to be adjusted and as a Minister I’m not entitled to own shares. So look we are being prudent as we always have been and maybe paying a little bit off extra on the credit card here and there where we can as I think most people will be doing.
ALI MOORE:
And when you look at what’s come out of Europe and the US over the weekend, I suppose the key move is the fact that European ministers have now guaranteed all inter-bank lending. Do you have some hopes that there is going to be a freeing up of this freeze that we’re seeing in banks refusing to lend money to each other?
CHRIS BOWEN:
I think that’s a welcome suggestion and it underlines the importance to us that when you have things like that happening in Europe we need to stay ahead of the pack that’s why we’ve taken the step to guarantee Australian borrowing overseas. Because if you’ve got a financial institution deciding which other financial institution to lend money to one of the big factors weighing on their mind and there’s a lot of nervousness in the financial markets at the moment. One of the big factors weighing on their mind will be if this all goes pear shaped will the Government of that country guarantee the loan. If Australia wasn’t guaranteeing the loan but Europe was then Australian financial institutions would find themselves perhaps on the end of the list. We need to make sure that they’re right at the top of the list.
ALI MOORE:
So sorry excuse my ignorance here but does your guarantee of all offshore borrowings of our bank equal an inter-bank lending guarantee? Which is what your response was about.
CHRIS BOWEN:
Well they’re all of a similar ilk I mean there are differences in the details but they’re all of a similar ilk which is to restore confidence in lending. One of the problems is that financial institutions are very nervous about lending to other financial institutions even over a very short period of time, and that’s what this measure is about. We say to other financial institutions, we say to a lot of Governments look our banks are AA rated we don’t have these problems but when you’ve got this nervousness around the world you don’t say well Australia’s different, we’ll lend you as much money as you need, but we won’t lend to others. We all have to, we’re all in the same boat and that’s why we’ve taken the step to guarantee.
ALI MOORE:
Just a final question, Assistant Treasures and this comes from one of our listeners, does the guarantee include term deposits?
CHRIS BOWEN:
Yes it does. All deposits with financial institutions which are regulated by APRA so whether it’s your savings account, your checking account, term deposits all those are covered.
ALI MOORE:
Thank you for joining us and good luck to that Sydney mortgage.
CHRIS BOWEN:
Well Melbourne mortgages are just as high.
ALI MOORE:
Yep absolutely, no doubt about that. Chris Bowen thank you.
CHRIS BOWEN:
Thank you.
ALI MOORE:
Chris Bowen there, the Assistant Treasurer