Keating predicts smaller eurozone

THE former prime minister Paul Keating says Greece, Spain, Portugal and Italy will depart the eurozone rather than face decades of austerity, and has called for Australia's $1.4 trillion of superannuation savings to be put to use by banks.

By InvestSMART · 22 Jun 2012

By InvestSMART ·
22 Jun 2012

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Speaking at an investment conference in Melbourne, Mr Keating described the Opposition Leader, Tony Abbott, as a "pre-Copernican obscurantist" and "dumb" for his relentless opposition to the carbon tax, but said Labor had failed to create a compelling narrative for its time in office.

Now working at the advisory and private equity firm Lazard, Mr Keating also labelled the German Chancellor, Angela Merkel, as "intellectually limited" and the Republican Party in the US as "completely mad".

In a spirited question and answer session, Mr Keating said the European "elites" had failed to recognise that Europeans preferred nationalism to a fiscal union, and would be better off waving the Mediterranean nations goodbye.

He said one way to reduce Australian banks' reliance on skittish international funding markets, and reduce risks for the country's $1.4 trillion super sector, was for super funds to finance the housing mortgages of banks.

"In other words, our banks should be doing less touting on the international markets and fulfilling their funding at home by having the superannuation assets, some of them directed towards the books of the Australian major four banks," Mr Keating said.

"I would prefer that than having the banks out there funding half their books in these soggy international markets," he said.

Mr Keating said that although between 55 per cent and 58 per cent of the big four banks' funding came from deposits, this would probably fall to about 50 per cent once the current savings boom ended.

This would leave the big banks - ANZ, Commonwealth Bank, National Australia Bank and Westpac - more exposed if credit markets seized up again during another crisis. During the depth of the financial turmoil in 2008, Australian banks were able to use the Commonwealth's AAA rating for a fee.

The Australian Bankers' Association chief, Steven Munchenberg, said that while the association did not agree with the idea that super funds should be directed to do as suggested, it did agree that "super funds should look more carefully at fixed interest products, particularly as we've got more people approaching retirement".

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Frequently Asked Questions about this Article…

What did Paul Keating predict about the eurozone and why should investors pay attention?

Paul Keating said Greece, Spain, Portugal and Italy are likely to leave the eurozone rather than endure decades of austerity, arguing Europeans favour nationalism over a fiscal union. For everyday investors, this prediction highlights political and economic risks in Europe that can influence global markets and investor sentiment.

What proposal did Keating make for Australia's $1.4 trillion superannuation savings?

Keating suggested that Australia’s $1.4 trillion in superannuation savings be put to use by banks — specifically that super funds finance housing mortgages for banks — as a way to reduce banks’ reliance on volatile international funding markets and lower risks to the super sector.

How would having super funds finance bank mortgages affect Australian banks (ANZ, Commonwealth Bank, NAB, Westpac)?

According to Keating, directing some superannuation assets toward the loan books of the big four banks would mean banks rely less on international wholesale funding. That could reduce their exposure if global credit markets seize up and make their funding more domestic and potentially more stable.

What did the article say about the current funding mix of the big four Australian banks?

The article cites Keating saying between 55% and 58% of the big four banks’ funding currently comes from deposits, but that share could fall to about 50% once the current savings boom ends — potentially increasing reliance on wholesale credit markets.

Did the Australian Bankers’ Association support Keating’s idea to direct super funds to banks?

No. Australian Bankers’ Association chief Steven Munchenberg said the association did not agree with the idea of directing super funds to banks as Keating suggested. However, he did say super funds should look more carefully at fixed interest products, especially with more members approaching retirement.

What are the potential risks to everyday investors if banks rely more on international funding?

The article notes that if deposit funding falls and banks rely more on international credit markets, they would be more exposed if those markets seize up again. That exposure can ripple through lending conditions and financial stability, which are relevant considerations for investors and retirees with exposure to banks or super funds.

Who is Paul Keating and what perspective did he bring in this commentary?

Paul Keating is a former Australian prime minister who now works at advisory and private equity firm Lazard. Speaking at an investment conference, he offered strong views on the eurozone, bank funding and the use of superannuation assets, bringing a policy and market-structure perspective that can be of interest to investors.

What practical takeaway should everyday investors consider from this article about super funds and fixed interest?

One clear takeaway is the suggestion — echoed by the Australian Bankers’ Association — that super funds should pay closer attention to fixed interest products as more members approach retirement. For everyday investors, that means reviewing asset allocation and understanding how fixed income can protect retirement savings in a changing funding and market environment.