Retail Trade; Balance of Payments; ANZ job advertisements; Debt Management

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February 25, 2002
Joint Press Release: Federal Treasurer and New Zealand Minister of Finance
March 6, 2002
February 25, 2002
Joint Press Release: Federal Treasurer and New Zealand Minister of Finance
March 6, 2002

Retail Trade; Balance of Payments; ANZ job advertisements; Debt Management


Press Conference

Monday, 4 March 2002


SUBJECT: Retail Trade; Balance of Payments; ANZ job advertisements; Debt



Now while I circulate a press release on debt management, let me first comment

on retail trade and the balance of payments.

The retail trade data released by the Australian Bureau of Statistics this

morning were very encouraging and present an encouraging picture for the Australian

economy with retail trade growing by 1.4 per cent, higher than the previous

month, and up 8.7 per cent in the year to January 2001. Now that shows that

there was very solid growth going on in retailing in Australia and notwithstanding

a recession through a good part of the world, supported by low interest rates,

income tax cuts, Australian consumers kept spending.

Secondly, let me make a comment on the balance of payments. The current account

deficit was $6.6 billion in the December quarter, around about expectations.

Which puts the current account deficit at around 3.8 per cent of GDP. This is

higher than the September quarter balance of payments deficit but that was a

20 year low. The higher imports in the figures represent solid levels of consumption

growth and a strengthening in business investment with good capital expenditure

figures which came out late last week.

Let me make some comments on the ANZ job advertisements which were released

this morning. Although they showed a 5.4 per cent fall for job advertisements

in February, this was coming off a very sharp increase of 12.5 per cent in January.

And considering that very strong increase to have that 5.4 per cent fall, meaning

over the two months there was a net increase, was reasonably good news. Together

with low home interest rates, the First Home Owners’ Scheme, strong retail trade,

that presents a good picture for the economy in 2002 where Australia I believe

will defy US recession, Japanese recession, South-East Asian countries in recession,

and continue to grow. But we’ll have the national accounts later on this week.

Now, I want to make some comments about debt management. And I have put out

a rather detailed statement in relation to this. In view of the misinformation

particularly by the Labor Party in relation to this, and I would ask you to

bear in mind the facts.

In the 1970s and ’80s, the Australian Government used to borrow in foreign

currencies. And it did that because it believed that it would be liable for

lower interest rates. In the late 1980s Mr Keating wanted to be able to make

the boast that he was no longer issuing any Commonwealth Government securities

in foreign currencies. And so what began under the Treasury was issuing the

borrowings in A$ but then swapping into foreign currency which had the same

effect but enabled the Government to say that they were not borrowing in foreign

currencies, they were not, they were borrowing in A$ and swapping their borrowings

through swap transactions. That practice began in 1988 and JP Morgan recommended

that an exposure of 15 per cent be adopted. The theory was essentially that

there was a premium charged for borrowing in A$ which if you borrowed in foreign

currencies you did not have to pay and you got cheaper borrowings. I ask you

to bear this in mind.

What we are talking about is Government debt, Government borrowing. The policy

continued throughout the late ’80s and the ’90s. But as the Labor Party ran

up debt, the 15 per cent to be held in foreign currency ran up with it. If the

Labor Party had not run up debt, then 15 per cent to be held in foreign currencies

would not have run up with it. 15 per cent of zero is zero. 15 per cent of 100

billion is 15 billion. 15 per cent of 50 billion is 7.5 billion. What caused

the run-up in these swap transactions was the run-up in Commonwealth debt which

peaked under Labor at $96 billion in 1996-97. Following that up, the foreign

currency which was zero in 1988 which ran up to its peak of US$9 billion in

1997. Two factors, run-up in Commonwealth debt and a 15 per cent benchmark.

The question of whether 15 per cent was the right benchmark was reviewed and

endorsed by the Union Bank of Switzerland in 1996, by a joint report from BT,

Carmichael Consulting and Coopers & Lybrand in 1997, by UBS Warburg and

Dillon Read in 1998 and indeed by the Australian National Audit Office in October

of 1999.

The Audit Office did not criticise the practice. The Audit Office reported

on the practice and said that when the next consultancy was done, when that

review was done, the adequacy of the benchmark should be examined with it.

Now, the stock of debt came up against the 15 per cent benchmark in late October

2000 for two reasons. The first was, we were paying back Labor’s debt. Instead

of having $96 billion outstanding, 15 per cent was a much larger sum than the

approximately, less than $40 billion that we now had outstanding. 15 per cent

of $96 billion was whatever it was. By the time we had repaid $57 billion worth

of Labor’s debt, the 15 per cent of that was much less. So the stock had to

come down and in fact the stock was coming down. The stock was coming down ever

since 1997 because the Coalition Government was not borrowing. None of this

debt is Coalition debt. This is a question of how we managed the Labor Party’s

debt. And as we paid off debt you had to run-down and indeed there was a run-down

in relation to foreign currency. The second factor which meant that the benchmark

became tested in late 2000, was that the Australian dollar declined.

So in A$ terms, although you were not issuing new cross-currency swaps, in

A$ terms the value was going up. The second reason why the cross-currency swaps

came up against the benchmark.

The Australian Office of Financial Management stayed, it would be unfair to

say that they mechanically stayed within a 15 per cent at all times, there were

variations from time to time. But they more or less stayed in it. And it was

their policy to always target it up until October of 2000. And in October of

2000, the then Treasury Secretary determined that they should not move their

portfolio to meet the benchmark, upon a request from the Governor of the Reserve

Bank of Australia. And he said that they should not move their portfolio for

two months. That was done without reference to me but it was done, and I believe

with the right intentions and I also believe for very good policy reasons at

the request of the Governor of the Reserve Bank.

After that was done, knowing that the Governor would certainly raise this with

me, which he did first, around about 10 November, the Treasury informed me that

there was a two month holding position. The Governor of the Reserve Bank of

Australia asked me to endorse the suspension. At my suggestion he raised it

with the Auditor-General. And after doing so on the 6 December, I agreed to

that request. And I asked the Australian Office of Financial Management to review

why a policy of cross-currency swap should continue at all. And if it should,

whether it should meet a 15 per cent benchmark or some other (inaudible).

The Australian Office of Financial Management was asked to report by June 2001.

The reason it had that time was that there were no maturities occuring between

February and June of 2001. So it had time to do it. It came to the conclusion

that there was now no reason to continue the policy of cross-currency swaps

and I agreed with its conclusion and a schedule was set up between the Australian

Office of Financial Management, Treasury and the Reserve Bank as to, over a

long period of time, ensuring that foreign currency exposure was wound down

in the debt portfolio altogether. Now these swaps are 10 year swaps, some of

them are not due to mature until 2008 and so it is over a timeframe of that

kind of dimension that the AOFM will manage the portfolio to zero.

I agreed with the report of the Australian Office of Financial Management for

two reasons. One is, obviously there was a currency risk in relation to these

cross-currency swaps and secondly, there is now no longer the kind of risk premium

paid by Australians over and above what is charged on US denominated debt. This

is, particularly since 1996, the risk premium on Australian borrowings has come

down considerably.

The policy which was set up by Labor was ended under the Coalition Government.

The swaps which were entered into by Labor and also continued, but not in net

terms are being managed down. Now I want to make this point about Senator McMullan,

because he has gone a little bit queasy in all of his talks. I noticed on Sunday

for the first time he’s actually admitting this was a Labor Party policy, which

it was, and admitting that it isn’t on the Budget bottom line, which it isn’t.

And it isn’t on the Budget bottom line, because the Budget bottom line is prepared

in accordance with GFS statistics which are laid down by the IMF and interpreted

by the ABS and they do not include financing transactions. They did not include

the $96 billion Labor debt and they do not include our $57 billion run down

of it. That is why it is not on the bottom line. But this Government introduced

accrual accounting so that it now began to appear in the AOFM report which has

been on the record and has been investigated all along. And has been the subject

of various Senate Estimates questions for quite some time, certainly last year

was the same. I just want to make, and by the way to, I can tell you that we

are still handling a number of cross-currency swaps entered into by Senator

McMullan when he was the Assistant Treasurer, because they were 10 year swaps

and I am still trying to manage in relation to those, I think from memory about

$2.2 billion of Senator McMullan’s currency swaps are still on issue, another

point that he doesn’t regularly make. I give you the figure, yes he was Assistant

Treasurer from April 1990 to March 1993 when cross-currency swaps, with a total

exposure of $2.2 billion were entered into, of which there are still 3 outstanding.

So that is another point that Senator McMullan doesn’t make and modesty prevents

me from detailing the swaps which are still outstanding were entered into during

the period when certain advisers to Paul Keating were advising Mr Keating. But

I want to make these points in conclusion. You are talking about Government

debt, that is, Government borrowings, how you manage Government borrowings.

The Coalition Government has not borrowed in net terms since it was elected.

The stock of borrowings which are being managed is the stock of Labor Party

borrowings, first point. Second point, the entry into swaps was Labor Party

policy. Third point, the Government having repaid $57 billion of Labor Party

debt brought the exposure down. If that hadn’t of occurred the exposure would

have gone up. Fourth point, the 15 per cent benchmark was suspended at the request

of the Reserve Bank of Australia and I believe for good grounds. And I also

believe, incidentally, that a Treasurer would be very foolish to reject such

a request, but be that as it may, I think the request was right. Final point,

the policy was ended under this Government and will be managed down over the

medium to long term. If I may say so, the rest of the points that have been

made by the Labor Party and others are propaganda points which are nearly all



Are you blaming Ted Evans? Mr Costello are you blaming Ted Evans?


No, I think Ted Evans made the right call. Ted Evans …..




No, no let me finish. Ted Evans received a request from the Governor of the

Reserve Bank and he agreed to it. I think the request was right and I think

he made the right call. I received a request from the Governor of the Bank and

I agreed to it. I think the request was right and I made the right call. I am

not blaming him in the slightest.


What are the economic policy grounds on which Mr Evans made the decision. Surely

they linked into your decision making? It says here that he directed the AOFM

to maintain its foreign currency exposure on economic policy grounds.




What were the economic policy grounds?


Well, I think we say there, if I can find the release, what they were. Macroeconomic

policy considerations – substantial repayments of swaps at that time would have

added to the weakness of an already sharply declining dollar. We say it there

what the grounds were and the second was commercial considerations.


Mr Costello, what has been the total economic gain or loss since 1987 on this

cross-currency swap?


Well you can’t say. This, with all due respect, this is where the reporting

has been completely misleading.




No, no, no let …




No, no let me tell you what a swap is. A swap is, I’ll just pull out some examples,

a swap is an agreement to swap currency and to unwind it at a future date, mostly

in 10 years time, not all, but mostly in 10 years time, so there are swaps outstanding

which have to be reversed, I’ll take one here, the 10th of April 2007. Now,

you want to know what the gain or loss on that is? I can tell you if you can

tell me what the exchange rate is going to be on the 10th of April 2007 and

what the margin between the $US and $A will be from then until now. Now what

people do, is they say, well let us pick a particular day, look at a particular

exchange rate, assume an entire liquidation on that day, leave aside the interest

rate differential and come to a conclusion as to a profit or a loss. And the

day they choose mostly is the 30th of June because it is the end of the financial

year. But these aren’t maturing on the 30th of June. Now, this is where you

are at a disadvantage because somebody can pick a day and they obviously try

and pick a day that suits them very, very well and they say well if you don’t

like that figure, you tell me the right amount. The difficulty is, you can not

tell them the right amount without knowing the exchange rate on a particular

day and the interest rate differential between then and now.


So, it is not possible to put a total value on the gains and or losses of this



Well, I don’t think it is possible, but I must say, others have tried to do

so, I think the Treasury gave evidence that they, they thought and this was

their evidence, that over a long period of time, they believed that you made

an economic return. That was the evidence that they gave. But you can assess

an economic return in respect of a past portfolio, but you can’t assess it in

respect of future transactions, you just can not do it. So if you want to know

what the economic return is in relation to future portfolios you can not do

it. That is why I say, this is my decision, I take responsibility for it, if

there is no compelling reason by terms of interest differential, I don’t think

it is a policy that should be continued and that’s the conclusion.


…vigorously questioning this policy since 1994. Why, when you came to

office in 1996 did you not act against it then?


Well, I would have to see who you say was vigorously contesting it, but…


…Senate estimate hearings (inaudible)…


…well, I would have to see who it was, but it certainly was not me, right,

nor was it the Prime Minister to my knowledge. What did we do? We continued

a policy which had been in place since 1988 and had been endorsed by JP Morgan,

Union Bank of Switzerland, Bankers Trust, Carmichael Consulting, Coopers &

Lybrand, UBS Warburg, Dillon Read and the Australian National Audit Office.

Now, I guess, you know, we could have sat down and said we know more than the

Union Bank of Switzerland, and BT, and UBS Warburg, and all of the others, but

we didn’t. We relied, well, as it was, we relied on the Treasury which relied

on those advisors. Were they entitled to do so? Well I think they probably were,

I think they were. At the end of the day I have come to the conclusion that

the original rationale, which was that you could borrow cheaper in US dollars

than A dollars no longer holds, or no longer holds to the extent that this is

advisable. Now, I have wound this policy up. You could turn around to me and

say in a month’s time if the exchange rate moves favourably, this decision has

cost money. You could say that and you would be right, absolutely right. In

fact, if you assumed a liquidation today as compared to 30 June in this financial

year it has. But I don’t think you can sit round and say, oh well, you know,

we are going to sit here day in day out, and decide what our currency position

is. I don’t think it is the right policy, that is why I have ended it and then

we won’t have to argue about these things any more. Yes.


Treasurer, you gave the example of a swap that expires on the tenth April 2007,

can you just, for an example, give us the exchange rate that was entered into

at and the interest rate differential?


I don’t know.


Treasurer, as the swaps expire…


I don’t manage these things, I don’t actually enter into swaps…




…in 1997 they would have been entering into, probably it was a 10 year

swap entered into in 1997. I don’t know what the interest rate was and I, you

know, I can’t, you say to me what is the value of it, I say you can’t know until…


No, what was the value that we entered into it at?


…you can’t know, you can’t know.


Were they entered into at the current spot exchange rate?


Generally speaking I would think so, yes.


Treasurer, as the swaps expire and the positions have to be realised who is

going to pick up the tab…(inaudible)?


Well, you know, you assume that there are going to be billions of losses, I

haven’t heard that from anybody apart from the Labor Party whose losses are

falling greatly. It started off at $4 billion and I think they are now down

to $600 million, aren’t they? And falling, because we know that their position

has fallen during the course of this financial year.


But if the Australian dollar doesn’t appreciate in value over the lifetime

of the remaining swap it will be, I am just saying who is going to be paying



Well, you know, you say that but let’s suppose there have been liquidations

at other points. This policy actually could have saved very large sums of money.

And if you decided to go into a liquidation several months ago, as compared

to that, you have probably saved very large sums of money, very large sums of


There is only, there is only one point you can make here, is, that if the Labor

Party had not have run up $96 billion worth of debt nobody would have been going

into any transactions. That is the underlying thing here, 15 per cent of nothing

is nothing, 15 per cent of $96 billion by the time they got it to $96 billion

was a very large sum. If they had not have added $80 billion of debt in those

last 5 years, 15 per cent of $80 billion is what, $6 billion, you would have

had $6 billion worth less of foreign exposure. At the bottom of all of this

you have got to remember these are borrowings. This is how you manage your borrowing,

the currency you are going to put your borrowing into. This Government has not

borrowed in net terms since 1997. This is the underlying point in all of this.

So I could turn around to you, and I think I could say to you quite rightly,

how many billions of dollars have been lost in addition to the $96 billion that

was run up by the Labor Party? Well, you give me an exchange rate and I will

do a calculation for you, but I don’t think it means much.


Well, where is the money going to come, now that you say it doesn’t affect

the Budget bottom line, it has got to come from somewhere, it has got to come

out of taxpayers pockets somewhere?


No. It just means that as we paid down the Labor Party’s debt of $96 billion

we paid it down both in A dollar terms and US dollar terms, redeeming the US

dollar exposures will take you more time than it would have been on more favourable

exchange rate assumptions.


(inaudible)…affect the Budget though?


Well, it would not cost you anything if you were not re-paying debt.


But we are, that is the trouble.


Well, we weren’t, that is the trouble, we weren’t. The trouble is that we ran

up $96 billion of debt, if I may say so, if we had not have run up $96 billion

of debt there would not be any debt in any currency to manage. This seems to

be a point that seems to have eluded Senator McMullan.


I was just going to ask, I think the last contract was taken out in April 2000

but the dollar had been deeply depressed well below 65 cents at that point.

I was just wondering why you would have ticked off on that?


Well I did not tick off on this, that is the first point. I do not actually

enter into cross-currency swaps. And I make that point, neither I, nor Ralph

Willis, nor John Dawkins, nor Paul Keating have ever entered into a currency

swap. The Australian Office of Financial Management enters into swaps.

When I asked them why they entered into it they told me because they were retiring

some US dollar debt. They were not entering into a new transaction it was done

in order to retire debt. You see, we have not been entering into new debt. So

all of the transactions that have been happening have been transactions designed

to get the Commonwealth out of its borrowing positions. This is where the great

explosion comes onto the Labor Party – their debt, their policy – and still

I am still, today, managing liabilities entered into when Senator McMullan was

the Assistant Treasurer. Now you say to me, well, how will you get out of that?

Well, we will have to pay our way out of these transactions, but gee, it would

have helped if he had never actually borrowed it.


Treasurer, do you accept that the decision you took on, the agreement you made

on sixth December, that that decision has cost taxpayers at all?


Sixth of December.


Sixth of December where you agreed to the request that the Government made,

I think that, you and the Treasury Secretary, you said the request was agreed

by me on sixth of December.


Yes, well…


Because isn’t that…


Of course not, of course it is not, that is obvious. Think about it. The question



But they are unrealised, I mean your argument is that they are unrealised losses,

Treasury (inaudible)…




…are unrealised and that the contracts haven’t yet expired?


Yes, and we made the decision that we were not going to move to a benchmark

and we were going to get out of the business. And I do not think anybody can

say that decision cost the Commonwealth money, I think, I think the argument

is rather the reverse.

I think the argument is you should have made that decision earlier, if I may

say so. I think that is the argument that is being put. It is certainly the

argument that Keating’s adviser, Jonathon Edwards, was putting earlier today.


Well why wasn’t that decision made earlier?


Well, that is why I love this argument. You made the decision too early, or

alternatively if you didn’t make it too early you made it too late. His argument…




…hang on, let’s go through this, his argument is, you accept that by ending

this you lost money, no I do not. Oh well, do you accept that by not ending

it earlier you should have gone the other way you have lost money? Now, you

can construct these arguments either way you like and, you know, you can get

it on this way and if you can’t get it on this way you can get it on that way.

But there are a couple of incontrovertible facts here. One, the policy was a

Labor Party policy. Two, the debt was Labor Party debt. Three, the Coalition

Government started re-paying it and four, it ended the policy. Now you can do

a daily analysis as whether you had been smarter to do it on the sixth of December

2001 or, you know, let’s look at the spot exchange rate on the sixth of December

2000, or let’s look at the spot exchange rate, you know, the great unkown is



Treasurer, with respect…


Hang on, I am sorry, this is a very important point. Who is to say that the

spot exchange rate in two months time may not mean that you should take a different

idea in two months time. Obviously, unless you can predict the exchange rate

on a…




No. That is why I came to the conclusion that it was a bad policy and I ended

it. I mean, at the end of the day we came to the conclusion, I came to the conclusion

on the recommendations of the AOFM that the advantages in relation to these

transactions were not such as to outweigh the arguments, the kind of arguments

that you could invariably have. Now whether you think I was right or whether

I was wrong, I was the Treasurer that ended it and I think it was right. And

I do that with the agreement of the AOFM, and with the Reserve Bank.


But at the end of the day you have been managing Commonwealth debt for the

past 6 years, you are sort of deflecting some of the blame onto the Labor Party

but do you concede that the Government played a role here?


No. There would have been no debt except for the Labor Party. Can I make this

point, we have not raised any debt. This debt, what we are talking about is

the currency in which you borrow and which you hold your debt. There would have

been no debt, you would have had no debt, you would have had 15 per cent of

zero is nothing, an exposure in US dollars of 15 per cent times nothing times

US dollars. I mean this is the whole, this is where it all starts from. The

Labor Party ran up debt, the policy was to have 15 per cent in foreign currencies,

the 15 per cent as it ran up, ran up, since 1997 it has run down. Now I could

go back and do an analysis and say what happens if we had not have run it down,

what would the exposure today have been? And I think you could produce a legitimate

equation which would show that not only was the paying back of debt saving you

money but it was, you know, it was a good, it was good in relation to swaps

as well. I mean you can do that kind of analysis but at the end of the day,

rather than do that, I think the important thing is to bring the policy to an

end. Now, let me make this point, I did that on the sixth of December after

I was notified on the tenth of November. So after it was raised with me by the

Treasury, after I had taken soundings I made my decision within three weeks.

And I do not think anybody can suggest that was a long period of time.


…swaps existed before November 2000?


Before November 2000 I had not been asked to suspend the benchmark. The Treasury…




Well they were within the benchmark, there was no question arising, they were

within the benchmark. They were not in danger of breaching the benchmark. The

potential to breach the benchmark occurred in October and the Department took

the decision not to seek the benchmark. And I became aware of the benchmark,

being up against the benchmark in November of 2000. I made various inquiries

and we took a decision on the sixth of December.


But you must have been aware that the depreciation of the Australian dollar

by that stage, those swaps had become very adverse, you must have been aware

of that?


Well, can I say, there is a lot of considerations in that decision and this,

I think as the Reserve Bank Governor made, was not the only one.


Is it the case this would have been a catch twenty-two, if you had sold off

the swaps then that would have (inaudible) pressure on the exchange rate which

would have made them even more of a problem for…(inaudible)?


One of the absolute imponderables isn’t it? And to people who say why did you

not observe the benchmark, and want to do an analysis for that day, what exchange

rate would they use? Let me ask you that question, what exchange rate would

they use? And that is why, that is precisely if I may say so, precisely, why

the kind of analysis that is going on now is wrong. I am not going to say any

more about that but you have got to, you have to try and work out a benchmark

to move off with alternative scenarios. And, you know what they always do? They

always try and find the most rosy.


So are you satisfied that the advice you got from these various investment

bankers, particularly like in ’98 with UBS when, as you said, the (inaudible)

had already started to shrink on Australian investment (inaudible)…?


Look, you can go back to 1996, you have got to remember this, oh look, it is

not my business to defend merchant banks but you can go back into 1996, pre-Asian

Financial Crisis and say why did you not predict the Asian Financial Crisis,

put that into your assessments? Or you can say why did you not predict the US

Recession of 2001 and put that into your assessments, or, why did you not predict

the last three Japanese recessions this decade which have moved the Yen dollar

benchmark. I mean I must say to you, I have never made any bones about it, we

did not predict the Asian Financial Crisis. It would have been helpful if UBS

Warburg had, yes, that would have been helpful, but do I say they should have?

I do not think anybody in the world did.

Yes, last question.


After the contracts expire after 2008 how much pressure will it put on the

Australian dollar because the AOFM Report makes clear that, all be it, at a

whatever rate it was last year in June that they will be paying out billions?


Well, as I said, they are going to take a medium to long-term position on this

which goes out to 2008 maybe even, if they were just to allow the portfolio

to continue it goes out to 2008 anyway. So what they are going to do is they

are just going to manage it down according to a pre-agreed schedule.

And what people are doing, you know, with these various things is they are saying

let’s take an exchange rate on a particular day, not the exchange rate of 2008,

let’s take it today. And depending on which day you choose you can move these

sums around by billions. Now the people that want to write up a big scandal

always choose a good day. I could choose a bad day to start the transactions,

but at the end of the day, and you know it varies by billions accordingly, and

you have got to make all sorts of assumptions about what would have been the

case, what would have been the case, had you done this, except it was not what

actually was the case. This is the important thing, it is what would have been

the case. That is why you have got to go right back over it and so I think the

proper thing to do, and this is my decision, and you would be perfectly entitled

to say to me in a month’s time or two months time if the exchange rate moves,

that closing this down was the wrong thing to do. You would be perfectly entitled

to do that and you could pick a day and you would be able to run that. But at

the end of the day I do not think these things were entered into for currency

reasons. They were entered into to try and get cheaper US interest rates. I

am confident that we can keep the premium between Australian interest rates

and US interest rates down, and that is why I do not think there is any rationale

and that is why I made the decision which I did.