View Full Version : Recommended viewing, RE: Australia's finsec problems

04-08-09, 05:22 AM
The Perfect Storm


Last year Australians watched in disbelief as the financial markets of Europe and America faltered and collapsed. What started as a credit crunch on Wall Street spread round the world, plunging economies into recession, destroying trillions of dollars of wealth and putting millions of people out of work. Now it's finally hit home in Australia.

For months we were told it couldn't happen here, that China's hunger for our coal, iron ore and nickel would shield us from the worst of the financial storm. But now we know that China's economy is in deep trouble too — its steel industry cutting back, its factories closing. And our resources boom has gone bust. In the last six months, prices for the metals Australia exports to the world have fallen by half. Suddenly, being linked to China looks like a minus not a plus.

Against this backdrop, business reporter and author, Paul Barry travels to Queensland, a state which has been growing as fast as the Asian Tiger economies, to see what's happening at the coal face.

His report will shock you.

The state's biggest regional centre, Townsville, is being rocked by layoffs of hundreds of workers, as resource companies cut costs and production or close down mines. The knock-on effects are already being felt as companies that supply the mines also start shedding staff. Local businessman Allan Pike believes unemployment will double within months, to 8 or 9 per cent or more.

Business finance is drying up as companies scramble to secure funds from banks that no longer want to lend. Having lost their shareholders’ money in risky margin loans and subprime mortgages, our banks are now starving enterprises that employ ordinary Australians.

Carey Ramm, principal economist with the AEC Group tells Four Corners, "Productive enterprises that employ thousands of people are struggling to refinance. And you know that's really the crux of the matter. We've got banks behaving very badly."

Property companies and builders are being forced to liquidate assets or go under. Big names in retail are shutting stores to cut costs or simply closing down. Big investors are getting margins calls again as the stock market heads south once more. And mum-and-dad investors are losing too.

Another collapse — of Townsville's Storm Financial — threatens to wreck the lives of thousands of average Australians who took the company's advice and borrowed millions of dollars to invest in the share market. With prices down nearly 50 per cent from the peak, many have lost their homes and life savings, because they believed the boom would go on for ever.

Gary Dietrich is a Storm investor: "I knew there was a risk with the stock market but they kept assuring us it would have to be a devastating loss for a long time before we were even in any sort of trouble."

Gary and his wife, Pauline, now live in a caravan parked in their son's front yard.

It's a mess and it's only just the beginning. In Four Corners' first program of 2009, Paul Barry talks to … business giant, Gerry Harvey, Risk Analyst guru, Satyajit Das and the businesses and people in the eye of this financial storm. The way we got here is no longer so important – the pressing question for those being battered is – how and when are we going to get out of it?



Mortgages doled out to people on disability support pensions; loans to refugees with no English and no jobs that leave their families with next to nothing to live on; home loans so large they push borrowers below the poverty line…

This isn’t America’s sub-prime meltdown – it’s Australia’s debt debacle, the legacy of a credit binge that’s sent household debt through the roof and lending standards through the floor. Now the hangover is kicking in.

As many as 300,000 Australian households may be at risk of losing their homes. It mightn’t take much – another rate rise or two, a family illness or maybe just the car breaking down – to send people under. And for thousands more who are better off but feeling the pressure, this credit crisis is getting too close to home.

Dianne and her family are frontline casualties. Their home is being repossessed after constant refinancing landed them with two mortgages, one at 10 per cent and another – on terms they didn’t understand - at 20 per cent.

Four Corners meets them as they despairingly pack their belongings and give up the keys. Why did they take out loan after loan? "Because they keep giving them to us," is Dianne’s blunt reply.

It’s not just fringe lenders but also big banks which have pushed unaffordable credit. "We lent to whoever we could and as much money as they wanted," admits a former bank credit salesman.

Four Corners reveals how one major bank dished out unsustainable loans to numerous refugee families in one area. Some had no English and no job. In one such transaction a nine-year-old girl acted as interpreter. Elsewhere a disabled pensioner tells how her welfare cheque and small part time wage were enough for another bank to lend her $200,000. She is now in penury.

These cases exemplify how lending standards have slackened. Not long ago the rule of thumb was that mortgage payments should not exceed 30 per cent of gross household income. Now lenders leave borrowers teetering on the poverty line.

Mortgage stress is compounded by plastic debt. "The banks are just handing out money on credit cards like there’s no tomorrow… It’s quite terrifying to think that the average household… now has three months of their disposable income on a credit card balance," says one analyst.

All the rage now are store-branded cards offering in-house credit with zero to pay for several years – then, typically, punishing interest takes effect. More than 10,000 stores offer these cards and many shoppers have several of them - but behind nearly all of them is one global financial colossus.

Many Australians have gone deep into the red to fund a newfound love affair with the stock market. The amount they have borrowed to buy shares now equals the total they have racked up in credit card debt. And as Four Corners discovers, when the market plunges and a margin call comes, some people are just reaching for the plastic…

Reporter Stephen Long surveys the human wreckage of the household debt crunch and looks at the key players and tactics behind recent aggressive lending. Long’s disturbing report also throws doubt over the data that banks rely on to make crucial lending decisions.

Tax Me If You Can


His present identity and whereabouts are mysteries to all but a select few. When he reveals his story to members of a powerful US Senate committee, he’s just a silhouette on a screen. The man who used to be known as Heinrich Kieber lives his life immersed in secrets.

Six years ago Kieber was an obscure computer technician updating systems inside LGT, a bank owned by the royal family of tiny Liechtenstein. Now he’s attracted international fame, fortune and alleged death threats as a whistleblower, after making off with 12,000 pages of LGT documents that set out its clients’ extremely private financial affairs in embarrassing and often incriminating detail.

"His revelations are explosive," sums up a US Senator.

Kieber sold the data to German authorities for about $6 million. Now hundreds of Germany’s richest are being investigated for their tax affairs. Jail may await some. And a posse of western governments, including Australia, are tracking the fortunes that their wealthy citizens stashed behind the secret walls of Liechtenstein’s banks.

Four Corners tells the remarkable story of Heinrich Kieber – roguish hero to some, amoral thief to others - and the worldwide fallout from his actions.

In the US, Europe and Australia there is fresh impetus to crack down on tax havens. About 50 countries sell bank secrecy services to foreign clients in a thriving industry worth trillions – and Liechtenstein is seen as one of the worst culprits.

As Four Corners reports, a rare spotlight has now been thrown on the devices Liechtenstein uses to keep its clients’ affairs away from the tax man. Many are complex; some disarmingly simple, like posting letters from neighboring countries to avoid attention.

"Foreign clients come to Liechtenstein because they receive excellent service and excellent products here," says a Liechtenstein government spokesman, before adding, "and certainly bank-client secrecy might have been a reason."

US Senate investigators have been poring through the LGT documents and interviewing witnesses – including Kieber – to claw back some of the estimated $US100 billion a year lost in US tax revenues to tax havens. About 1400 people are mentioned in the documents yet the Senate committee plucked out just seven as case studies. One of those seven dealt with an LGT account established by Australia’s Frank Lowy and his sons.

The Outback Oracle
04-12-09, 12:26 PM
How long can this go on? 1.67% World GDP and 10% of world debt


David Uren, Economics Correspondent | April 13, 2009
Article from: The Australian

THE Government's equivocal attitude towards Chinese investment in the resources industry might have the effect of destabilising the balance of payments.

Australia has become highly dependent on Chinese direct investment to fill the gap between income from exports and investments and our outgoings on imports and debt-service.

Westpac foreign exchange strategist Robert Rennie estimates Australia received $9billion in foreign direct investment in the second half of 2008 which, as he says, was "no mean feat in the midst of the global slump in M&A activity".

Just adding up the published merger deals worth more than $100million, China accounted for about $5billion of this total.

The flow of foreign direct investment has become much more important to Australia's payments balance as access to debt becomes more strained, as Rennie's chart shows.

In the closing months of 2008, the banks, armed with their government guarantees, hit the debt markets hard -- raising $24billion in new bonds. However, this was not enough to cover a rapid unwinding of the Australian banks' short-term overseas debt, which fell by a net $48.8billion in the quarter.

The surge in direct investment made the difference in covering the current account deficit. Where would we have been without it? Rennie says that in history, whenever one financial market closes, another opens. However, the global financial crisis means this can no longer be counted as a sure thing.

Australia's deficit is narrowing. There are two ways the current account deficit can be seen. It represents the gap between income and outgoings on trade and investment income, which includes both dividends and interest. This is identical to the gap between investment in Australia and domestic savings. To the extent that Australia's savings are insufficient to cover investment, it calls on overseas savings.

The deficit has gone from 6.5 to 4.3 per cent of GDP since the first quarter of last year as business investment has levelled off while household savings have improved. This has been evident in the improvement in the trade account, which has swung from deficit to surplus, mainly as a result of a fall in imports of machinery and consumer goods. Australia is still borrowing about $10 billion a quarter to service its $680 billion foreign debt.

The improvement may slide later this year as the rise in household savings is offset by a sharp fall in the contribution of both the public sector and the corporate sector to national savings as tax revenue and profits fall.

Australia has run current account deficits throughout its history, as foreign investors have sought to profit from development of our resources.

Although deficits and the accompanying rise in foreign debt were traditionally viewed as a source of national vulnerability, this attitude changed during the 1980s, following the floating of the Australian dollar and the development of an international market for Australian dollar-denominated debt.

The classic balance of payments crisis occurs when a loss of international confidence results in a sharp devaluation, which forces up the cost of servicing foreign currency-denominated debt.

Australian banks and companies have won insulation from this squeeze by either borrowing overseas in Australian dollars, or borrowing foreign currencies and using the swap market to shift the exposure to Australian dollars. Their balance sheets are not jeopardised when the currency falls. The other symptom of a balance of payments crisis is soaring interest rates when central banks attempt to defend their exchange rate in the face of a speculative attack.

Australia's free-floating currency means that business might have to confront great volatility in the exchange rate, but not punitive interest rates.

Australia's performance during Asia's financial crisis spawned the idea that our balance of payments was bomb-proof.

Australia was initially expected to plunge with the region, and indeed its currency fell from US80c to US60c. However, then it stabilised, as foreign investors realised the economy remained sound. The lower exchange rate enabled Australia to trade profitably through the regional recession.

In his recently updated book The Return of Depression Economics, Paul Krugman puts the question: "If Australia could so easily avoid getting caught up in its neighbours' economic catastrophe, why couldn't Indonesia or South Korea do the same?" His answer is that a loss of confidence can become self-fulfilling and that, in the cases of Indonesia and South Korea, it did.

"Maybe buying when everyone else is rushing for the exits isn't such a good idea after all; maybe it's better to run for the exit yourself."

Confidence in the midst of the financial crisis is fragile. It might be a failed government or bank bond tender, a fall in the exchange rate, or a big receivership that leads international investors to curb their Australian exposure.

The OECD, in a policy brief issued last week, urged nations to keep their doors open to foreign direct investment during the financial crisis. It noted that portfolio investment and debt finance to the 24 largest emerging economies had dropped from $600 billion in 2007 to nothing.

Foreign direct investment also fell last year, with inflows down 13 per cent. The OECD expects the fall over 2008 and 2009 will be closer to 33 per cent, while during the modest recession in 2000, cross-border investment fell 50 per cent.

Because of China's influence, total direct investment in Australia hit an all-time record of $28 billion last year.

The Outback Oracle
04-12-09, 12:28 PM
"He who panics first ...wins!!"

Not sure who originated that quote..but it sems pretty applicable around here!