Thursday, July 5

Letters to the Editor updated

Below are my published " Letters to the Editor "  which appeared in the Australian Financial Review- several featured cartoons composed by their resident cartoonist are now included.  
Capital needs to flow back into Europe 
Robert Guy, in his article “G20 row over euro debt crisis” (AFR June 20), highlights growing tensions that haunt global markets.
Underlining these tensions is the flight to safety of capital flows ending up in the stronger European states or the US. But if European austerity measures are to have any chance of success, disadvantaged states such as Spain and Italy must have access to funds at comparable rates to other states, and be able to initiate stimulatory investments from the savings derived from austerity measures.
Italian Prime Minister Mario Monti makes the point that no one believes Europe was “the only source of the problem”.
The source of the problem is a lack of investment and fiscal stimulus, which applies to those voicing the heaviest criticism of Europe, the US and Britain, which remain reliant on their respective central banks to do all of their heavy lifting. No serious attempt has been made to identify any long-term budgetary savings as a source of funds for much-needed immediate investment expenditure to boost confidence both sides of the Atlantic. 
The current position is indicative of an absence of political leadership and is increasingly a source of frustration to central bankers running out of options to keep their respective fragile economies afloat.
Given decisive leadership combined with new investment spending, weaker European member states could again grow sufficiently to reduce their current crippling unemployment.

Australia better prepared than in 2008
Alan Mitchell’s article  (AFR, June 18) warns of possibly six months’ misery for Australia should Greece eventually exit the euro.
Mitchell draws on HSBC Hong Kong economist Frederick Neumann who posits that a Greek exit would precipitate “a full-blown credit crunch on a scale that would make 2008 seem mild (with the) European economy falling into a deep recession”, and this would have dire consequences for our region. However, since the onset of the 2008 global financial crisis, Australia’s position is a far cry from to what existed then as our banks are now far less reliant on short-term overseas wholesale bank funding.
The banks’ loan books have on average 4½ years until maturity and, combined with massive capital injections, mean any bond issuances rate highly with investors should additional funds be required.
But at present they already have sufficient funding to cover the next six months, assisted by a surge in customer deposits reflective of our high national savings rates – at 9.5per cent of disposable income the highest in 30 years.
Should Europe enter a prolonged and deep recession, have no doubt our Reserve Bank also has the capacity to engage in quantitative easing to ensure increased funding is made available to the financial services sector.
Australia is now very well placed to actively deploy her very substantial defences against any future global

Importance of  Greece overstated
You would be forgiven for thinking Greece must be our major trading partner given the elongated Greek 
crisis has become a proxy to explain away sharp falls on our stockmarket. Our trading with Greece is negligible but if she was to exit from the euro zone a devaluation of her currency followed by an appreciation of the euro would boost our revenues from the region as our exports would be more competitive. The risk of contagion to Portugal and Spain is minimal as there exists ample monetary facilities within the euro zone (of half a billion people) to accommodate any credit fallout. The euro zone has managed to avoid a recession unlike that of the United Kingdom. Those who argue the euro is destroying employment and preventing member countries like Greece from competing because of their inability to devalue a currency ignore recent political history.
Greece’s economic woes of higher unemployment and falling gross national product followed on after the 2007 election when the New Democracy Party managed only a very narrow majority whilst the left significantly increased their standing.

The market fears that the June re-elections will have a similar result and should Greece leave the euro zone it will cause untold havoc. 
This is an exaggeration since we depend, as does any country, on both good governance and the continuing ability to create wealth before you can spend it. 

Victoria counts on illusory surplus 
In “Case of the $129m health bill” (May 14) Mathew Dunckley points out that making up $100 million of this year’s promised Victorian budget surplus under “other revenue” buried at the back of the budget papers is a transfer of medical indemnity liabilities to the Victorian Managed Insurance Authority.

Although the state technically correctly treats this transfer out of liabilities as creating a surplus under accrual accounting, this is only because the accounts for the VMIA are not included in the budget papers. Rather, under the Whole of Government Accounts consolidation the position is clear – the gain to the Department of Health transferring out these liabilities is matched by the same amount transferred in to the VMIA for a zero overall effect. So it is illusory to count on this reduction in liabilities in only one set of books as representative of funds that contribute to an overall surplus. 

The transfer does not create revenue or income available to pay for services. Finance Minister Robert Clark was reported as saying “the final wash-up is that the bottom line is more than $100 million better off because it no longer has to worry about the misdeeds of doctors stretching back a decade”. Presumably the fine line of distinction he refers to is that VMIA, not the Department of Health, now has to worry about that.

JP Morgan makes mockery of Fed 

The latest revelation is that it has managed to lose $US2 billion in risky synthetic credit securities which turned sour eclipses any notion they are following reasonable banking practices and makes a mockery of the recent stress testing of financial institutions by the United States Federal Reserve.

These tycoons of industry who are paid a fortune to run these institutions obviously pay scant regard for shareholders’ funds which are used as gambling chips to make for huge trading bets. JPMorgan obviously has not learnt from past mistakes and reports have recently emerged of renewed in-house proprietary trading (making risky greedy induced trading bets) by other institutions which are unconnected to traditional banking services.

Regulators are dragging their feet in outlawing in-house proprietary trading which is at the expense of critical business lending and banking services in demand during this elongated period of aftershocks following the global financial crisis.

Regulators need to be more proactive and have a quiet word in the ear of the chiefs at the same time as a closer look at the books – the shame game will soon catch on to ensure the banking sector acts in a much more responsible manner.

Thankfully both the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority seem to be more on the ball, but it is a salutary lesson as to how easily these giant institutions can completely go off the rails and cause confidence in the banking system to dissipate.

Ideology gone astray
When Conservative Prime Minister David Cameron came to power in England in May 2010, he said you could eliminate the budget deficit and still expand the economy, but given the last two consecutive quarterly contractions one can now say England is officially in a nasty recession.
Cameron’s simplistic approach seems to have gained resonance in Australia on both side of politics given the obsession to achieve a surplus. The point that recurrent entitlements and consumption expenditure should be matched by revenue does not negate investment expenditure funded from borrowings providing enhanced returns are assured in future years.
This is needed in the non-mining sector of the economy to help stimulate demand and would not lead to inflation. The unveiling of the budget did little to address this situation, nor is recognised in any policy from the opposition. 

Will misses target
Washington Post columnist George Will, in “The right man for Romney” (Opinion, April 10), never strays too close to anything remotely resembling a policy debate.
As an erudite writer, Will’s unashamedly pro-conservative perspective is simply dripping in contempt for the present administration in the United States. He contends that President Obama’s often breezy and “sometimes loutish indifference to truth should no longer startle” and he asserts Obama is “not nearly as well educated as many thought and he thinks”. 
Will names Paul Ryan and Bobby Jindal as two possible Republican running mates for Mitt Romney as those with the intellectual firepower to counter Obama’s not so smart approach. 
Ryan he describes as “no one more marinated in the facts to which Obama is averse’’. 
Will is long on emotive phraseology and very short on specifics, a good indication as to just how limited the debate is on any serious policy alternatives in the US presidential race

Security overkill with Huawei

Local Huawei chairmen John Lord is justified in rejecting the assertion that a security risk justifies exclusion of the local arm of the telco giant, the second-largest supplier of telecom infrastructure in the world, in the building of the $36 billion national broadband network (“Huawei: “We’re no risk”, March 27).

Huawei has more than 100,000 employees with nearly half employed in research and development in Germany, India, Russia, Sweden and the United States. Their network extends to over 100 countries including most of the world’s 50 largest telecoms. 
ASIO, of course, doesn’t have to justify its position to the public nor has our Prime Minister in her muted response “it’s prudent”. But with a project of this size one might reasonably ask why security safeguards and undertakings for all contractors aren’t already sufficiently robust to afford security protection. 
Perhaps we should also ban US companies on the basis that more US military involvement here poses a national security risk bearing in mind the ease with which their own top secrets were posted for all to see on the Wikileaks website.It doesn’t seem as if we have travelled too far forward from the time when the headlines screamed "Reds Under the Bed "!!.

Aboriginal claims in Twiggy case
Jonathan Barrett’s exclusive “Twiggy’s land grab ” (March 17-18) reports an investigation by AFR which has found the iron ore heavyweight Andrew Forrest, founder of Fortescue Metals Group, to be the main culprit of an industry wide practice known as “tenement parking”: whereby miners purposely keep their exploration from being granted until they are inclined to explore the land.
It also mentions a legal challenge by Forrest & Forrest against Fortescue in relation to mining tenancies over the Forrest-owned Minderoo station with a possible inference this action represents a stalling tactic. But what is not reported is Minderoo station is already subject to a native title agreement with the Buurabalayji Thalanyji Aboriginal Corporation for access and rights under the current pastoral leases. It seems likely future protracted negotiations to allow exploration activities at Minderoo now owned by a private company with shares held by both Andrew and his brother David Forrest may be the subject of this legal challenge. What is also not reported in the article is the delay in exploration activity as a consequence of objections under the National Native Title Tribunal by indigenous groups objecting against expedited procedures in the granting of mineral tenements.
For a cash-strapped WA state government to sit back and allow companies such as Forstescue to stall on exploration outside of given timelines to avoid paying rents seems somewhat implausible. 

Baillieu’s WorkCover grab
James MacKenzie, chairman of the Transport Accident Commission and Victorian WorkCover Authority, reaches the inescapable conclusion that a state government’s decision to impose a dividend on the workers’ compensation and work safe authorities is akin to simply another tax on employers (“Baillieu raid threatens WorkSafe’s full funding”, Opinion, February 28).

The Baillieu government has taken just this course in its move to take $471 million in additional dividends from the WorkCover Authority. I can remember the previous mess for workers’ compensation in the state several decades earlier, before the present reform when employers faced crippling premium rates as high as 8 per cent of wages as a consequence of large payouts under common law underwritten by a number of private insurers. Fortunately today, after much needed reform, we now benefit from the lowest rates in Australia.

But as MacKenzie correctly points out, these are now at risk if the government decides on a policy of dividend imposition that can only be recovered in increased premiums from employers. Hiding behind this ideological bent to pay a dividend should be seen for what it is – an additional premium increase on employers for no reason other than to boost the Treasury coffers and give the appearance of good economic management. 

Resources future assured

Stephen Wyatt’s “Boom glory days drawing to a close” (Commodities observed, February 23) continues his theme that prices beginning in 2013 will suffer severe falls and put pressure on the share prices of BHP Billiton, Rio Tinto and Fortescue Metals.

Forecasting one year ahead is difficult enough, but predicting a 50 per cent reduction in the iron ore price over the next three years, as Wyatt does, even when quoting commodity analysts, is implausible.
Wyatt fails to acknowledge that in India and China, softer future steel-making demand for construction (and hence iron ore demand) may be more than offset by robust growth in the consumption-related sectors such as machinery and transportation.
This is a natural progression for these developing economies fuelled by demand from a burgeoning middle class and echoes China’s latest five-year plan.
China is aiming at reducing its reliance on exports and investment to be more reliant on local consumption to sustain its economy.
If there is going to be any slowing in demand in commodities then a more likely outcome is a gradual decline but anyone predicting further massive falls is foolhardy. The dynamism of developing economies and their ability to sustain demand for resources over the next several decades should not be underestimated.

Hewson’s bank bashing unfair
John Hewson’s “Greedy banks cry foul” (Opinion, February 3) is another example of bank bashing lacking substance. I am intrigued by his idea that banks operate in a privileged position as a virtual oligopoly and are greedy.
Bank returns for the four majors vary from around 13 to 17 per cent on shareholders’ funds, with the top notch going to Commonwealth Bank of Australia and with each having a very distinctive customer base.
Many listed Australian icons easily exceed this return such as Telstra at 26 per cent, Woolworths 28 per cent and BHP Billiton 38 per cent. Given the cost of capital is 12 per cent, the banks’ average returns of 15 per cent can hardly be viewed as excessive. In fact our banking industry is extremely competitive, as evidenced by the string of foreign banks that closed their local operations unable to realise commercial returns.
Thankfully we have a strong industry, which did not succumb to the overtures by foreign banks to engage in the sub-prime securities and derivatives market that caused banking giants in the United States and Europe to need huge publicly funded bailouts to remain solvent.
The only reason banks have to seek wholesale funding overseas at higher interest rates is because their local depositor base here is insufficient. Hewson and the flurry of bank bashers only serve to undermine what is needed: a strong, healthy, profitable, competitive banking sector which is critical at a time when overseas credit markets remain constrained.

Asia resilient on Indian demand

Stephen Wyatt’s gloomy assessment on commodities “China props up shaky demand” (January 30) notes that while China remains the elephant in the room, it is not the only game in town.
Wyatt fails to mention some of the supply restraints emerging or that other resilient markets such as India and those in our Asian region can and are leading the way in a revival in construction projects whose increased demand for steel will lead to an increase, for instance, of iron ore consumption.
In fact, India’s consumption of iron ore is rising at a time in which it is reversing its position from self-sufficiency to a major importer since the government took action against illegal miners.
Further supply constraints are arising from Brazil, whose mines were recently affected by the very heavy rains.
Depressed levels in the euro zone and the United States are unlikely to get much worse so that overall, even if there was curtailment in China’s appetite, the slack might be offset by demand elsewhere combined with emerging supply restraints. 

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