FRAN KELLY: Well the other guarantee announced by the Prime Minister yesterday and perhaps the most critical of the three point plan he announced is the Government’s guarantee of the interbank lending market, that is, banks lending to each other. Today’s opening of the share market will be the first test to see if this restores confidence and joining us now is Federal Finance Minister, Lindsay Tanner. Minister welcome again to Breakfast.
LINDSAY TANNER: Good morning Fran.
FRAN KELLY: Lindsay Tanner, what is the exposure of the government and the taxpayer in offering these guarantees?
LINDSAY TANNER: We think it’s highly unlikely that the guarantees will ever be realised Fran. In fact, the key reason for doing this is because other countries have been doing similar things - other countries that do have serious problems within their banking systems, which we don’t.
The challenge for us through is that if our banks are left unprotected then they are at a very serious competitive disadvantages relative to other banks, and for example the cost of them borrowing internationally, which has already soared, would go much much higher and that would be reflected in things like the interests rates they charge on their mortgages, so the need to do this is not because there is any serious problem within our banks, the reason is because other countries are doing it. Similar things occurred with short selling, we had to take interim action there, because of action taken in international markets.
FRAN KELLY: It’s a very important message for you to get out because last week when people were speculating whether guarantees like this were necessary, people were a bit concerned that if the government started to guarantee the banks and guarantee deposits that it that might spark a bit of panic within the community.
LINDSAY TANNER: You’re absolutely right. It’s something that we have sought continuously to reassure people that the reason we are suffering consequences from these international financial circumstances is not because there’s anything wrong in Australia, it’s because we are a relatively small economy in circumstances where the major economies, the US, the UK, some of the big European countries are in significant difficulties and what happens there eventually effects us.
We’re better insulated that almost any other economy. But these circumstances have reached a new and damaging stage internationally and therefore we have to protect Australia as best we can and keep economic growth going and keep jobs strong.
FRAN KELLY: The PM has out a figure on the open-ended commitment to guarantee or underwrite all deposits, that’s between six and seven hundred billion dollars, what about the exposure on the guarantee of the inter-bank lending. Have you priced that? Can you price that for us?
LINDSAY TANNER: The total amount of interbank lending that is effectively covered is somewhere around $700 billion. But these are, in a sense, hypothetical numbers Fran, because were the government to be called upon to stump up money for even a fraction of that, you would be in circumstances so diabolical that I wouldn’t even want to describe them. The point is to ensure there is confidence in the Australian banking system in spite of these international circumstances and that it’s not disadvantaged relative to other banking systems around the world.
We think it’s highly unlikely that any of these guarantees would ever need to be called upon. And we also believe that the guarantee of wholesale funding is in effect an insurance arrangement, because the banks will be asked to pay a fee, so this is not an open-ended commitment, there will be in effect an insurance premium that the banks have to pay for this arrangement.
FRAN KELLY: Nevertheless, it’s a liability that if it did have to be met, really couldn’t be met from our funds, could it?
LINDSAY TANNER: Well Fran, I think you’re off in the realms of speculation about the world coming to an end. I don’t think I’ll follow you down that path.
FRAN KELLY: Alright, but let me put it this way to you, to be truly diligent, about taxpayers exposure, for instance to the inter-bank lending market, the government would want to have a bigger hand in the oversight of lending practices? Will we see newer tougher oversight?
LINDSAY TANNER: The question of improving regulation of banks and lending practices is something that is always under consideration. But again, I’d emphasize, that the reason for providing these guarantees is not because there is anything wrong in Australia. The reason is that we have very serious circumstances internationally and the international response to those financial problems is creating a choice for Australia, where either we take similar steps or we see very negative consequences for our financial system and therefore for our economy, for growth and for jobs.
FRAN KELLY: Yes understood, but what I’m wondering in return for this guarantee, no doubt that the guarantee is necessary to allow banks to remain competitive and sounds, but in return for that, is the government demanding or will the government get a great insight? Oversight, sorry.
LINDSAY TANNER: First, these initiatives are temporary. And second, I’d emphasise, that any changes in regulation will be done as and when required if they are necessary. We don’t need to enter into deals with our financial institutions about regulations, we don’t need to negotiate with them about these things. If any regulatory reform is required, it will be dealt with on its merits. And I’d emphasise that the reason this guarantee is being given are all about what is happening internationally, it is not about tackling problems that exist within the Australian banks and financial institutions. It is tackling the flow-on consequences of these international problems.
FRAN KELLY: The PM yesterday when he announced this plan said the global financial crisis has entered a new and dangerous phase with real consequences for growth, for jobs and therefore the future. He went on to say the future is here and now and to talk about, thinking about how to most intelligently use our surplus to maintain positive growth. That sounds like some kind of stimulatory spending will be part of the government’s response. Is that how you see it? And what can the government do in the very short term?
LINDSAY TANNER: This question is under active consideration right now Fran. It’s one of the levers available to the government. If you have serious downward pressure on activity as we are now seeing as a result of the international circumstances, we will have available to us the option of increasing government spending very quickly. There is a whole variety of possible things that can be done and clearly they are part of the consideration. I can’t speculate where this might end up, because we have got a whole range of information in front of us, we’re getting very regular updates on the international circumstances, advice from Treasury and from our regulators. This is one of the levers available to us and one of the things we are now actively considering.
FRAN KELLY: Obviously, tax cuts are an obvious one, but one sum that has been bandied around lately, the PM says a $10 increase in the pension would cost an extra $2 billion. In other words, another $2 billion into the economy. Is that a good place to start? Could that be on the table?
LINDSAY TANNER: The two key or main areas that traditionally have been involved where you have things of this kind being considered, do relate to either to direct payments for people, whether it’s welfare payments, pensions, unemployment benefits or family payments. There is a whole range of government payments or changes in the tax system, they’re the kind of things that get money flowing. But also direct spending on economic activity government. Government is a major player in the economy directly. Governments build things, we’ve already seen one small, but significant initiative, of accelerating the process relating to Infrastructure Australia infrastructure investment. So there is a pretty wide range of possibilities here Fran, but I won’t speculate where we might head because the decision is yet to be made about whether or not to take stimulatory action through the budget. It’s one of the options we are thinking very carefully about right now.
FRAN KELLY: But presumably, the option is to perhaps bring some of that spending promises forward before the Budget?
LINDSAY TANNER: That’s one of the options. We shouldn’t forget that the cut in the interest rates a week or so ago, together with the fall in the value of the Australian dollar also have a very significant stimulatory effect . Some of that won’t be felt for some time but already we’ve got other forces pushing back against the downward pressures on the economy coming from overseas.
The question on whether you need further action, is something the government is now contemplating and we’re committed to taking the decisive action, whatever we feel is required, to keep the economy growing, to keep us in the positive and to keep jobs going strongly. That’s what ultimately the test is. But we’ve got to get the decisions right.
FRAN KELLY: Lindsay Tanner, thank you very much for joining us.
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