Professor the Honourable Stephen Martin, presentation GFC and Sovereign Risk - Solutions from Down Under

1. GFC AND SOVEREIGN RISK- MITIGATING MEASURES
AND SOLUTIONS FROM DOWN UNDER
Professor the Hon Stephen Martin
Chief Executive
INTERNATIONAL FEDERATION OF ACCOUNTANTS
CONFERENCE
THE SOVEREIGN DEBT CRISIS, A MATTER OF
URGENCY―FROM LESSONS TO REFORM
March 19-20, 2012
Vienna, Austria

2. GFC

3. GFC- a re-cap
 Northern hemisphere problem?
 Global savings/borrowing imbalances
 US encouragement of home ownership, sub-prime crisis and credit
crisis and US monetary policy
 Lack of regulatory oversight and corporate risk management
 Financial institutions collapse in US and Europe (Lehmann – the
financial world stopped)
 World GDP falls, global trade collapses
 Business/Consumer confidence plummets, unemployment rises
 Massive fiscal/monetary stimuli
 Huge support for financial markets from central banks

5. Australia and the GFC
 Not nearly as bad as other developed economies
 Growth rate slowed
 Exports fell, commodity prices fell, terms of trade
contracted, exchange rate fell
 Credit provision tightened
 Consumer and business confidence fell
 Unemployment rose slightly
 Share market fell
 No banks or financial institutions failed

7. Government response to GFC
 Hard, early, households
 Massive surplus of $21b available for injection into the economy
 Support for the finance sector through bank guarantees, funding
housing mortgages through government securities, consumer
protection
 RBA movement on interest rates
 Major economic stimulus through
 social security system (pensions and family allowance) $8.8b
 increasing first home buyers grants $1.5b
 Education and training programs $187m
 Nation Building and Jobs Plan (including Building the Education
Revolution, energy efficiency, infrastructure, housing) $42b

8. European Sovereign Debt Crisis

9. European sovereign debt crisis- causes
and solutions
 globalization of finance
 easy credit conditions during the 2002-2008 period that encouraged
high-risk lending and borrowing practices
 international trade imbalances
 real-estate bubbles that have since burst
 slow growth economic conditions 2008 and after
 fiscal policy choices related to government revenues and expenses
 policy responses used by nations to bail-out troubled banking
industries and private bondholders, assuming private debt burdens or
socializing losses.
 Greek tragedy, potential contagion, Germany the boss, hopeful signs,
more meetings, financial bailout, white knights?

10. I’m gonna make her an offer she can’t
refuse

11. Europe- A View From Down-Under
Source: The Australian – 17/1/12

12. Australia’s preparedness for the GFC
and European sovereign debt crisis
 Commonwealth of Australia 1901- economic, political and monetary
union
 Economic and political history since the early 1980’s
 Trade liberalisation
 Financial deregulation coupled with improved and coordinated
prudential supervision
 Labour market deregulation
 Taxation reforms
 Macroeconomic policy- inflation targets, budget deficit and fiscal
consolidation strategies
 Superannuation
 Health care and social security reforms

14. Australia’s economic advantages
 Underlying economic strength- mining and investment
boom, record commodity prices and terms of trade
 Strong financial institutions- four pillars, AA rated,
exceptional profit levels, Basel III alignment
 Sound financial regulation- APRA, previous financial
system reviews, lessons from the past
 Performance of major trading partners, particularly China
and India. Little exposure to Europe.
 Social-economic interconnectedness

19. Government spending and revenue
Per cent of GDP Per cent of GDP
30 12
25 9
Spending
Total receipts
20 6
15 3
10 0
Underlying cash balance (RHS)
5 -3
0 -6
2000-01 2002-03 2004-05 2006-07 2008-09 2010-11 2012-13 2014-15

20. Factors affecting Australia’s current and
future economic performance
 IMF/Government forecasts for world growth and implications for
Australia and its trading partners
 Economy defined by contained inflation (in 2-3% target range), low
public debt (24% GDP), massive investment pipeline, unemployment
levels half of Europe (5-5.25%), geographic location (right place, right
time to benefit from the Asian Century)
 Cautious consumers and exchange rates affecting some industry
sectors (retailing, manufacturing)
 Government commitment to budget surpluses
 Australian financial institutions exposure to Europe much less than
2007, strength and security of the financial system

21. Country Gross Debt to GDP
(Central Government, %)
China 17.1
Australia 24.1
New Zealand 35.8
Sweden 37.3
Switzerland 52.7
Norway 54.3
Spain 63.9
Germany 80.1
United Kingdom 83.0
France 87.6
Portugal 90.6
United States 99.5
Ireland 114.1
Italy 120.3
Greece 152.3
Japan 229.1

26. Lessons from Australia
 Currency union without fiscal union is an accident waiting
to happen
 Low, single-digit inflation a goal that must be pursued
 Fiscal consolidation is essential, along with tight prudential
regulatory regimes that still allow for deregulatory
outcomes
 Underlying economic fundamentals must be right
 Political will must permit governments to take hard,
unpopular decisions and pursue appropriate policies

28. THANK YOU