Malcolm Turnbull (Wentworth, Liberal Party, Shadow Treasurer) Share this | Link to this | Hansard source

My question is addressed to the Treasurer. Can the Treasurer advise the House of the risks to the Australian financial sector and Australian consumers from the severe financial distress of the world’s largest insurance company, AIG?

Wayne Swan (Lilley, Australian Labor Party, Treasurer) Share this | Link to this | Hansard source

I thank the Leader of the Opposition for this very serious question. I can inform the House that earlier this morning our time the US Federal Reserve announced that it would provide AIG, the American International Group, with an $85 billion emergency loan. In exchange, the US government will take a 79.9 per cent stake in AIG. The Australian government certainly welcomes the actions by the Federal Reserve, which, of course, have the full support of the US treasury. This announcement will provide much-needed support to AIG internationally and, of course, to the broader US market.

We do need to be very careful when we are commenting on the impact of these events on the Australian subsidiaries of AIG. We have to be very careful indeed. The relevant regulator, APRA, has strong prudential engagement with AIG—indeed, as it has all across the sector. The Australian businesses which are regulated by APRA are required to hold assets in Australia that exceed their liabilities in Australia. They are required to do that. But, nevertheless, because there could be flow-on effects, APRA is continuing to talk to the local subsidiaries. We do need to distinguish between the impacts on the international operations and on their Australian subsidiaries. The Australian subsidiaries are working within the framework that APRA has put out there.

The regulators are doing everything they possibly can to ensure that the events internationally have minimal impact on policyholders, whether they be general insurance or the life insurance component. That is what APRA is doing as we speak. Of course, we will continue to see further volatility on global markets. There will be companies in this country which are investors in the international operations of that company, so we might expect some impacts on companies similar to the impacts we have seen, for example, from those that were investing in Lehman Brothers.

What I can say—and I think this is very important and we should continue to shout it from the rafters—is that our banking system in particular is well regulated and it is well capitalised, as is our insurance industry. We have seen what happened in the past when that was not the case. That is why it is so important that we do put in a broader response to this international volatility that has been going on since last August. That is one of the reasons why the government committed to a financial claims scheme so promptly. That is why the government have been absolutely determined to implement all of the recommendations of the Financial stability review. We have been doing that. Part of that is encouraging firms with exposure to disclose those as quickly as possible and part of that has been to get a commitment to a financial claims scheme in this country should the worst happen to one of our deposit-taking institutions.

As many people in this House might well recall, there have been recommendations to a recommendation to the previous government about establishing such a scheme. In fact, the original recommendation for a financial claims scheme came from the HIH royal commission. The member for North Sydney would, of course, remember that. We have acted on that recommendation—something the previous government did not do and did not follow through on. I am pleased to say there has been bipartisan support for the Financial Claims Scheme that we have put forward. It is currently out there for industry consultation. It has been through the cabinet, and it will be going to parliament in the not-too-distant future.

Since August last year, and since we have been in power, we have been acutely aware of the danger to the Australian economy flowing from these events in international capital markets, and we have used every possible lever within our control to prepare our country to make sure that we can survive the situation in the best possible shape. It remains the case that, if you were in any country in the world in these circumstances, the country you would want to be in is Australia.

Damian Hale (Solomon, Australian Labor Party) Share this | Link to this | Hansard source

My question is to the Prime Minister. Can the Prime Minister update the House on developments in international financial markets overnight and on the government’s response?

Kevin Rudd (Griffith, Australian Labor Party, Prime Minister) Share this | Link to this | Hansard source

The Treasurer has just referred to developments in the last 24 hours in relation to AIG. The government and the financial regulatory authorities in Australia continue to monitor developments closely. Of course, these developments in relation to AIG follow on from recent actions in other respects in the United States by the Federal Reserve. They injected another $70 billion in liquidity into the financial markets overnight, following $70 billion the previous day. They also announced last weekend that they would accept a wider range of collateral for cash loans as a means to calm financial markets. Of course, this follows action in recent weeks to take control over the mortgage institutions Fannie Mae and Freddie Mac, pledging up to $200 billion to support them. However, it is important to note also that the Federal Reserve said in their statement of 16 September that ‘strains in financial markets have increased significantly’ and that they ‘will monitor economic and financial developments carefully’.

What these developments point to is the fact that we are living in exceptionally difficult global economic times, and we in Australia are not immune from these developments. That is why it is important for all members to be focused on the fact that we the government have a plan to see Australia through these difficult economic times. Firstly, this is anchored in our approach to strong economic management, grounded in a $22 billion budget surplus as a buffer for the future. Secondly, there is our $76 billion nation-building plan for infrastructure in ports, roads, rail and broadband. Thirdly, there is our long-term economic reform agenda to lift long-term productivity growth through an education revolution and through our program of business deregulation as well as our policy of long-term tax reform.

On the question relating to immediate developments in the financial sector, the government has also been acting in concert with its own monetary authorities and through international cooperation with the global economy and financial markets to ensure that sufficient liquidity is available. In the last few days there has been action by the European Central Bank to inject some €30 billion of liquidity, as well as parallel actions by other central banks around the world. Some months ago in Australia we injected further activity into the government bond market through an action taken with the support of the opposition to the tune of some $25 billion. As just referred to by the Treasurer, we have been in the business of implementing a financial claims scheme to ensure that eligible deposit and insurance policy holders have appropriate protection.

These are important national measures which the government has taken in relation to our own financial markets, and we have been acting in concert with others in international financial markets through the Financial Stability Forum and also through the IMF and the G20. It is important to note what the Governor of the Reserve Bank said on this matter just a week or so ago. The governor, Glenn Stevens, said on 8 September:

… what we see in the Australian financial scene is an order of magnitude less troubling than what we see abroad … Australian financial institutions continue to present a contrasting picture to their peers in the US, Europe and the UK … Some have had to make provisions for unwise exposures that had been accumulated earlier. But even in these cases, capital, asset quality and profitability remain very sound.

Therefore, it is important that we keep the current challenges being presented to us from the global economy and global financial markets in appropriate perspective.

As the Treasurer also indicated before, we in this country are better prepared than most to deal with the buffeting which is being presented to other national economies by recent developments in global financial markets. If you look at the continued positive growth generated in the Australian economy in the most recent quarter, you see that it is 0.3 per cent against what is a decisively negative set of numbers across most of the other major global economies. If you were also to go to our inflation rate: while still unacceptably high, it is nonetheless lower than that of the United States. For the first time in seven years we have interest rates that have been reduced by 25 basis points. On the question of employment and unemployment—and this has been the subject of some questioning in this House in recent weeks—the current rate of 4.1 per cent stands at almost the lowest of the other major economies, the US being 5.7 per cent; the UK, 5.3 per cent; Canada, 6.1 per cent; France, 7.3 per cent; Germany, 7.3 per cent; and Italy, 6.5 per cent. We have also had recent positive data in terms of the capital expenditure intentions of Australian private firms.

But where I conclude is on the question of what underpins our confidence in the government’s policy directions for the future, and that is the strength of the government’s budget surplus. On the question of the surplus, we have worked hard through the budget process to ensure that we could deliver a 1.8 per cent of GDP surplus outcome for the year ahead. What I would draw the attention of honourable members to, however, is the fact that that budget surplus position again stands in stark contrast to what we see on the part of many other economies—the United States running at minus 2.4 per cent; the United Kingdom, minus 3.8 per cent; Japan, minus 2.8 per cent; France, minus 2.9 per cent; Germany, plus one per cent; and Italy, minus 2.8 per cent. Therefore our budget circumstances, relative to those which pertain in other major economies, are sound and strong indeed.

In order to preserve this buffer for the future, against what is a set of quite challenging international and global economic circumstances, it is important that we do everything we can to preserve that budget surplus. My direct appeal to the new Leader of the Opposition is to unblock the budget in the Senate. My direct appeal to the Leader of the Opposition, as he says he is now in the business of providing economic leadership, is to demonstrate that leadership in the Senate and unblock the $6 billion worth of measures that are currently blocked in the Senate, in order to preserve the budget surplus—a budget surplus which is a necessary buffer in these uncertain economic times for Australia.