Wayne Swan speech: Securing our strength for the future
In a speech at the Euromoney Australasian and Asian covered bond forum on Thursday, Australian treasurer Wayne Swan warns that Europe faces “rolling crises and volatility” ahead of Greece’s make-or-break election this weekend, and strikes a sanguine note about the outlook for Australia’s economy:
This is an edited transcript of the speech by Wayne Swan, deputy prime minister and treasurer, delivered at Euromoney’s Australasian & Asian Covered Bond Investor Forum.
“Thanks, it’s great to be here today – I think we’d all agree that there couldn’t be a more appropriate time to discuss the strength of our financial system. After a period of relative calm on global financial markets in the first quarter of this year, volatility has intensified as dark clouds again gather over Europe.
In particular, markets are watchfully anticipating the outcome of fresh Greek elections in just three days time – the most immediate source of uncertainty.
While the trigger points are different, the underlying themes are the same.
The same deep-seated challenges facing the common currency persist in the form of excessive sovereign debt and the burning need for economic growth.
European policymakers have made some progress on structural reforms to boost growth and reduce debt, as well as reinforcing their financial firewalls.
As all of you in this room would be aware, the European Central Bank has played an important role in providing huge amounts liquidity to the banking system.
On the weekend, we saw a much-needed European agreement to support the recapitalization and restructuring of the Spanish banking system.
This was obviously a welcome step, but clearly there is still a lot of work to be done to ensure that the final details of this arrangement are appropriate.
And, of course, Europe still faces a much broader set of challenges.
In a pattern now all too familiar, European politicians are still well behind the curve, having failed to take advantage of the months of relative calm.
There is no escaping the conclusion that Europe has a long and painful road ahead – with the most likely scenario being rolling crises and volatility.
The simple fact is that European policymakers have a lot more heavy lifting to do. Put simply, what is required is some basic political courage.
Leaders are elected to lead and that’s what Europe’s leaders must do.
They must act now to boost growth and support job creation.
They must accelerate their transition towards greater fiscal and financial union, to strengthen the monetary union.
And in the medium term, they must get their budgets back on a sustainable footing and persevere with the tough structural reforms that are so critical to building competitiveness for the future.
In Australia, we have a proud history of muscling-up to deliver hard-fought, politically unpopular economic reforms that have made this country great.
But Australia’s model for economic prosperity has also shown that you can balance fiscal responsibility with growth.
And the world is looking to Europe to do the same.
Of course, like many of you in this room, I’ve spent a lot of time since the global financial crisis talking to investors across every time zone.
And everyone in this room knows that investing in Australia is a pretty attractive prospect in the boardrooms of New York, London, Hong Kong and Tokyo.
Our economic fundamentals are among the strongest in the developed world.
We’ve got impressive growth, low unemployment, contained inflation, very low debt, and a pipeline of mining investment worth half a trillion dollars.
Our economy grew a stunning 1.3% in the March quarter, outpacing every single major advanced economy over that period.
That translates to a remarkable 4.3% growth through the year – making it the fastest growth in over four years.
Then, last Thursday [June 7], we saw the Australian economy added more than 46,000 full time jobs in the month of April.
The economy has created over 800,000 jobs since November 2007, while 27 million people have joined the back of unemployment queues around the world since the global financial crisis.
Our economy is over 10% larger than it was at the end of 2007, while most advanced economies aren’t even back at the starting line yet.
And we are forecast to outperform every single major advanced economy over the next two years.
Of course, we are starting from a position of strength because we got the big economic calls right during the depths of global financial crisis.
We acted decisively with fiscal stimulus to support economic demand when global confidence and trade fell off a cliff, and the private sector retreated.
Our prudent action then meant we were almost alone in the developed world in avoiding recession, giving us the foundation for future growth.
In fact, in the March quarter alone we grew faster than any of Germany, Italy, France and UK did over the whole year to March.
And with our economy forecast to grow around trend, it’s appropriate to bring the budget back to surplus to give the private sector room to grow.
In these circumstances, it’s appropriate that monetary policy again assumes its conventional role as the primary tool for managing economic demand, while the government keeps making long-term investments in productive capacity.
Balancing the budget ensures the government is not generating price pressures in an economy with a half-trillion-dollar mining investment pipeline.
Growing surpluses give the Reserve Bank of Australia [RBA] the maximum flexibility to cut interest rates if it thinks that’s necessary, and we’ve already seen that confirmed by the equivalent of 125 basis points of official rate cuts since November last year.
And with the global outlook still uncertain, and markets punishing those without a credible fiscal plan, it’s critical we continue our budget discipline.
Strengthening surpluses will underwrite confidence in our already very strong public finances, as the foundation for confidence in our broader economy.
Australia has some of the strongest government finances in the world.
As you’d all be aware, we were recently upgraded to AAA by Fitch, meaning we now have the highest rating from all three global ratings agencies for the first time in Australia’s history.
In fact, today we are one of only eight sovereigns to be awarded the coveted AAA rating with a stable outlook by all three agencies.
And every Australian business that raises capital in international markets has a very strong interest in our first-class sovereign rating.
Because, as you all know very well, a strong sovereign balance sheet plays a very important role in supporting cost-effective issuance by financial institutions and other corporates.
Our fiscal strategy builds on the decisive action we took during the depths of the global financial crisis to secure the flow of finance to the economy.
We acted quickly to bring in a wholesale funding guarantee which allowed our financial institutions to access offshore debt markets on competitive terms, in return for an appropriate fee.
We accelerated the introduction of the Financial Claims Scheme we’d been working on for some time to give Australian depositors confidence their money was safe in any bank, credit union or building society.
We stepped in as a cornerstone investor to preserve the super-structure of the Residential mortgage-backed security [RMBS] market through our Australian Office of Financial Management investment programme to support competition in the banking sector and the flow of credit to borrowers.
Together with the RBA’s coordinated response, and other government measures, this action helped keep unemployment low and has ensured that Australian mortgages remain among the highest-quality collateral in the world.
So, there is absolutely no doubt that we face continuing global economic volatility from a position of strength.
And just like the government’s balance sheet is strong and getting stronger, we must continue our agenda to strengthen the nation’s balance sheet.
Because we are a capital-hungry nation.
In recent years, our gross national saving has been around 24% of GDP – over one-third higher than the average of G7 countries.
But our national investment is around 28% of GDP – around 50% higher than the average for G7 economies.
So, we have high national savings, but even higher investment.
We have built up a very strong reputation as a stable and efficient importer of capital – now more than ever an island of certainty in a sea of volatility.
But we must continue our focus on building up our domestic funding capacity.
We need to do more to boost national savings – and while bringing the budget back to surplus is an important part of this, it’s not the whole story.
I encourage all of you here to have a read of Statement Four in Budget Paper One, which I talked a bit about early last month in delivering the 2012-13 Budget.
It sets out our strategy to not only boost public savings, for the reasons I talked about before, but at the same time to also boost our private savings.
And that’s more important now than ever, with the global economic environment weak and fragile.
The government’s reform to boost superannuation from 9 to 12% will add A$500 billion to Australia’s national superannuation saving pool by 2035.
This will see Australia’s pool of superannuation savings grow from over A$1.3 trillion to almost A$7 trillion by 2037 – by then around 130% of GDP.
We’re also putting in place measures to help build a deep and liquid corporate bond market – although clearly there is no silver bullet here.
We brought the buy-side together with the sell-side late last year for a roundtable to discuss the barriers to boosting domestic issuance in Australia.
We’re also making very good progress on streamlining disclosure and directors’ liability for retail corporate bond issuance, and the trading of Commonwealth government securities on a securities exchange in Australia.
And while our banks were proven among the safest in the world during the global financial crisis, they’ve been further building their strength since 2008.
Our banks came through the biggest stress test in three quarters of a century in very good health, thanks to their sound risk management and, of course, the vigilance of our world-class financial regulators in the years before the crisis.
Australian lenders didn’t engage in the risky lending practices seen elsewhere in the world, and our supervisors wouldn’t have let them if they’d tried.
And since the global financial crisis, our banks have reduced their use of short-term wholesale funding sources, increased the average maturities of their borrowings and substantially boosted their deposit funding.
They are well funded for a significant period ahead, very well capitalized and don’t have any material exposures to troubled European nations or lenders.
But, of course, it’s just common sense that our financial institutions should have as many strings in their bow as possible when it comes to funding.
That’s why, in December 2010, I announced that the Gillard government would allow covered bond issuance as part of our agenda to secure the long-term safety and sustainability of Australia’s financial system.
The announcement of this reform was the product of the government’s very close work with the industry and our regulators since at least early 2010.
Then following two rounds of consultation, I introduced legislation into parliament to amend the Banking Act on September 15 last year.
I expect that date – September 15 – will ring in the minds of nearly every person in this room.
It was, in fact, the third anniversary of the collapse of Lehman Brothers, which I think we’d all agree was the focal point of the global financial crisis.
Of course, there could not have been a more appropriate day on which to introduce this fundamental economic reform to diversify the funding options available to Australian financial institutions and through them the economy.
In the parliament, I put the case for covered bonds based on a range of benefits, which I think we would all agree have since been demonstrated through the A$30 billion-worth of covered bonds already issued:
– Access to this new, more resilient issuance class – so far issued in five different currencies apart from our own – has been critical in helping our financial institutions weather heavy market turbulence; – Against this backdrop of global instability, the capacity to issue for terms of up to 18 years is helping our banks continue to lengthen their maturity profiles and comply with new Basel III liquidity requirements; – Domestic covered bond issuance is also helping to channel Australia’s national superannuation savings through the financial system into productive investment in all sectors of our economy; – Covered bonds have provided access to cheaper funding relative to the cost of senior unsecured issuance, and spreads have tightened somewhat since their introduction.
As I said last year, I thought it was absolutely critical to give our financial institutions access to this important market, given Canadian and Norwegian banks were coming down here and cleaning up our savings.
I was determined to give our financial institutions the tools they need to compete for funds on a level playing field.
And I’m really pleased to see that one of our regional banks – Suncorp – has now executed a covered bond deal.
I look forward to the day when the first group of credit unions and building societies get together to jointly issue under the framework we provided.
But all along we’ve been supporting smaller lenders through our highly successful RMBS investment, along with the comprehensive package of other competition measures we’ve already put in place.
It has been very encouraging to see our regional banks and mutual lenders growing their market share over the last year or so, using many of our reforms, and I’d like to see them continue with more of the same.
I’m really proud of the success of our competition reforms, just as I am proud of the actions we took to secure the financial system during the crisis, and measures like covered bonds, which will continue to build on this strength.
It’s all part of the government’s broad agenda to get our economic settings right for the challenges ahead, while we make the most of our opportunities.
So, thanks for having me here today and I look forward to hearing what comes out of the discussions you’ll be having through the rest of the day.”