Peter Costello (Higgins, Liberal Party, Treasurer) Share this | Hansard source

I thank the honourable member for Deakin for his question. I can inform him that overnight the United States stock market suffered further falls of around 1½ per cent arising from the subprime crisis in the United States. Stock markets around the world have followed suit as a consequence and, as of a short time ago, the All Ordinaries was down some five per cent. That is a very severe fall and one of the largest falls that we have seen in the last decade.

The consequence of that, however, is that the All Ordinaries is still some 17 per cent higher than its close at the end of 2005 and still around 35 per cent higher than its close in 2004. The news in the United States overnight concerned rumours that mortgage lender Countrywide Financial was having difficulty raising funds. The Australian financial system is not nearly as exposed to subprime or equivalent lending as that of the United States. In the United States, it is about 15 per cent of mortgages; in Australia, it is about one per cent.

The financial implications for the Australian economy are therefore much less as a consequence of subprime or non-conforming loans. However, there are Australian originators that do raise their funds in the United States. They raise funds in the United States to on-lend to Australian borrowers. Those institutions will have more difficulty raising those funds, and they will be required to pay a premium for raising them. As a consequence, some of those loans could rise in Australia because risk is being repriced. For those borrowers who have taken a loan from some of those institutions, there could be a direct effect. This issue does not concern the Australian banking system. The Australian banking system is well capitalised. There is no reason for Australian banks to pass on any consequence of this subprime failure in the United States.

Can I say that I have been in contact throughout the morning with the Australian Prudential Regulatory Authority. I have been in contact throughout the morning with the Reserve Bank of Australia. Our markets are functioning normally. There is liquidity in the markets. The arrangements that have been put in place are serving us well. One of the first things that the government did was to set up the Australian Prudential Regulatory Authority and, over the course of the last decade, it has discharged its duty very well indeed. Of course, this is not the first financial difficulty that the government has encountered. The Asian financial collapse of 1997 was certainly the biggest financial collapse of our lifetimes. As a consequence of that, we tested and strengthened our institutions, and they came through that crisis very strongly.

In closing, I say that it is important to bear in mind the real economy. The real economy is growing strongly. Despite the drought, it is growing at 3.8 per cent. Employment growth is solid, with over 250,000 new jobs created over the last year. Wages growth continues to be strong and sustainable. The profit share of corporate Australia is at an all-time high and, in due course, stock prices will reflect those fundamentals. But this is a very significant development which is affecting Australian equity markets. It will affect Australian credit markets. It will affect some Australian borrowers. It will require very capable prudential arrangements, and it will require sensible economic management which focuses on the fundamentals. This is why we get the fundamentals of an economy strong: so that the economy can weather severe events which have a significant effect of this dimension.

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