Interview with Chris Uhlmann

The World Today, ABC

Thursday, 16 August 2007

12.10 pm

SUBJECTS: Markets

UHLMANN:

Peter Costello, good afternoon. 

TREASURER:

Good afternoon, Chris.

UHLMANN:

Now we have seen a significant adjustment on world financial markets and on the local market.  What risks are there to the real economy?

TREASURER:

Well the markets are down again globally.  And in Australia now the market, the stockmarket is back to where it was at the beginning of the year.  But that is still substantially up on where is closed at the end of 2005 – about 20 per cent up.  Having said that, the fallout from the United States is significant.  It is not only affecting now global equity markets but it is affecting credit markets and it is leading to a re-pricing of risk.  That is, at the end of the market where risk is greater, the margin will be greater.  And that will mean that people who are raising money for higher credit risks will find the cost of that money higher. 

UHLMANN:

So in essence we are seeing a flight of money from the system and that could have enormous ramifications for the economy?

TREASURER:

Well let me make two points.  The first is of course, the banking sector is very well capitalised, there is a lot of liquidity and we have in place arrangements which ensure that there is sufficient liquidity.  At the other end, there will be people even in Australia who have been raising money in the United States.  And because of the development in the United States, lenders in the United States who were lending to these kinds of loans will be asking for a margin.  They will be asking for a higher margin to continue that lending.  And so in relation to that part of the market, you will feel an effect in credit ratings. 

UHLMANN:

So when we see non-bank lenders like RAMS for example, could we see mortgage rates for ordinary people rise way beyond what they are now?

TREASURER:

Let me make this point: there is no reason whatsoever why there should be any change in relation to the banking system.  I make that very clear because the banks are well capitalised and there is no reason whatsoever why they should be affected.  But if somebody was raising money in the United States to on-lend to Australians, then that person may find that they will have to pay more to raise that money in the United States and eventually you might find that affect their lending in Australia. 

UHLMANN:

Well RAMS for example, has been borrowing in the United States and it has got $5 billion now that it can’t finance at the moment because of a lack of market liquidity and it is looking for short-term options.  What does that mean for those people who have borrowed from companies like RAMS?

TREASURER:

Well let me make it clear that in relation to borrowers, all of the borrowings have been insured.  That is a very important point.  So from a borrower’s point of view, insurance is there and of course that is what you would hold out to the lenders, that there is insurance.  But going forward, people who are raising money in the United States will not be able to raise it at the same kind of prices, in order to raise it they will have to pay a bigger margin.  And what is going on at the moment is the world is re-pricing risk and they are going to charge a bigger premium for risk. 

UHLMANN:

When we look at monetary policy in Australia, we recently saw an interest rate rise and now we are seeing the Reserve Bank in Australia pumping more money into the system.  Now, I know it acts as a sluice gate to try and keep that rate right just at the right level, but doesn’t that look like two contradictory movements in monetary policy?

 TREASURER:

Well bear in mind that the statement adverted to what was happening in the United States and the assessment was – this was last week – that those developments weren’t sufficient to out-weigh other developments but I think there has been…

UHLMANN:

A week is a long time in monetary policy.

TREASURER:

…I think there has been some developments in the last week and I think we will have to keep it very carefully under review.

UHLMANN:

Now when we look at what has been happening with fiscal policy which you control and monetary policy which the Reserve Bank controls, over the last few years we have seen the Reserve Bank tightening monetary policy and we have seen you giving out tax breaks to people, in effect putting more money into the system.  Now don’t we have one part of the economy with its foot on the accelerator and another part with its foot on the break?  And as Chris Richardson from Access Economics says, is it any wonder that the economy is blowing smoke?

TREASURER:

Not in the slightest.  Because what the Commonwealth has been doing is it has been running surpluses.  We have now had 10 surplus Budgets and I think the outcome from the last year was about 1½ per cent of GDP.  And we have paid off $96 billion of debt and we have set up our Future Fund.  Imagine if the Commonwealth Government hadn’t been running a Budget surplus.  Imagine if we hadn’t have paid off debt.  Imagine where we would be now.  Let me tell you, these issues will take a lot of experienced management and it is from the strong platform that we are at that we will be able to manage them.  But just imagine if we hadn’t had put our Budget in surplus, paid off debt and reformed our tax system.  Imagine where we would be today. 

UHLMANN:

I know that you are saying that the Labor Party would make these things worse but we are seeing a contagion at the moment coming from the United States.  Really they would have no effect on that (inaudible).  

TREASURER:

Well I don’t think that the Labor Party has the experience, nor the policy to manage these things and bear in mind…

UHLMANN:

But what exactly can you do about any of this at the moment?

TREASURER:

Well, let me make this clear.  The prudential regulation that I have put in place has been absolutely critical.  The fiscal policy which we have put in place has been absolutely critical and if people looked at Australia now turn its back on economic reform, which of course industrial relations rollback or throwback would be, let me tell you, that would really start affecting confidence. 

UHLMANN:

Now Treasurer, a couple of quick things.  Are you concerned that companies who have spending projects in place and that are also borrowing money internationally, that that might affect the spending of companies who have got big infrastructure going at the moment?

TREASURER:

Well you have got to bear in mind, there is a lot of borrowing going on in the private sector and huge borrowing going on by State governments.  It depends very much on what facilities they have got in place but if they were attempting to raise money overseas, they could find it harder to do that.  Now, the good thing is most of the companies have good credit ratings and the good thing is that most of the State governments have good credit ratings.  So their credit ratings shouldn’t be affected but you just might find it harder to put your hands on money.  Now, it won’t affect the Commonwealth because the Commonwealth doesn’t borrow.  The Commonwealth is actually saving money and I think we could all agree now that it is very important that it has been doing that.  Imagine if the Commonwealth were in the market borrowing at this time too.

UHLMANN:

If this credit squeeze continues, if the price of money continues to go up, are you concerned for the real economy? 

TREASURER:

No, the Australian economy is strong but here is my concern.  The exposure of the United States economy, the sub-prime market is about 15 per cent.  This is going to start affecting the United States and if it starts affecting consumer sentiment and activity in the United States, if the United States goes into a period of weakness, that will affect global growth and that will have an affect on Australia.  Yes it will.

UHLMANN:

Treasurer, thank you.

TREASURER:

Thank you very much.