Thursday, 16 August 2007
Questions without Notice
My question is to the Prime Minister. Would the Prime Minister inform the parliament what advice the government has received from the Reserve Bank and the financial market regulatory authority, APRA, on the implications for Australian mortgage holders of recent developments in the US subprime mortgage market?
That advice in the first instance would come to the Treasurer, and I know the Treasurer will have something to say about this matter shortly. Let me say to the Leader of the Opposition that it is very important at a time like this to reassert our very strong confidence in Australia’s financial institutions.
Australia is fortunate at this time that we have very strong, properly supervised and prudential financial institutions. We have two regulatory authorities, namely the Reserve Bank and APRA, both of which are run by people of the highest calibre. Clearly, a correction is taking place in world financial markets and that correction has been inspired by adverse developments in the American subprime mortgage market.
What I can tell the Leader of the Opposition is that, if you compare like with like, the number of loans in Australia which are the equivalent of the subprime market in the United States is about one per cent as against some 15 per cent in the United States. Some of the commentary mistakenly likens the low-document loans of some of the financial intermediaries to the subprime loans in the United States. That is a misinterpretation of the situation. The subprime loans in the United States are far more risky and adventurous and, for that reason, they have caused very considerable difficulties.
The markets at the moment are repricing credit. As a result of that, credit subject to being rolled over at frequent intervals will obviously incur a higher cost, and there will be some interest rate implications as a consequence of that. I draw the attention of the Leader of the Opposition to some of the more informed commentary that has been made on that matter.
Let me finally say to the Leader of the Opposition that, as we deal as a nation with this situation, we are fortunate that we do have strong financial institutions. They are well regulated. We have regulators in whom we have great trust. The other great pillar of our financial security is of course our very strong budget position. It is as well at this time that we have a strong budget surplus. It is as well at this time that we have low levels of inflation. It is as well at this time that this country’s credit ratings are very high around the world and we have a strong, balanced economy.
As people examine the stock market and the developments in it, we should remember that the Australian stock market has enjoyed rises over recent years of unprecedented proportions and has performed in a very strong fashion compared with other stock markets. It is very important at a time like this that people not overreact. Adjustments do occur from time to time and there will be consequences of that. But if your fundamentals are strong and economic management is experienced, if economic management has seen this country through earlier adverse developments such as the Asian economic downturn and the aftermath of the terrorist attack on 11 September 2001, that same strong economic management will serve this nation well at the present time.
My question is addressed to the Treasurer. Would the Treasurer inform the House of recent developments in world financial markets? What are the implications for the Australian economy? What does this indicate about the need for careful economic management?
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.