Robb's wrong-footed plan for government bonds
Andrew Robb's proposal to scrap Commonwealth Government Securities will impose huge costs on the Australian financial system.
In his seminal work in 1873, Lombard Street, Walter Bagehot literally wrote the book on the responsibility of policy makers – his focus being on central banks – to act swiftly in prevention of market dislocation.
History has unambiguously taught us that recessions which have their origins in a financial crisis are usually the most destructive force that can hit an economy. The financial system is the backbone of the modern economy, and the flow of credit is the lifeblood that keeps the economy ticking over.
The global financial crisis has seared this lesson into the world’s collective memory. Here in Australia, our banks didn't engage in the same excessive lending practices seen in the US, the UK and Europe – and our regulators wouldn't have let them if they’d tried. But when governments around the world brought in wholesale funding guarantees, we acted decisively to ensure our banks could continue accessing funding in global capital markets on competitive terms – a guarantee which of course our banks paid a fee for. We also accelerated the introduction of our Financial Claims Scheme, which we’d begun pre-crisis, to give depositors complete confidence that their money was safe, and provided a guarantee for the states to raise money offshore to keep funding critical infrastructure.
Our actions to secure the financial system, together with fiscal stimulus, helped Australia avoid recession and saved hundreds of thousands of jobs around the country. Our economy is now 11 per cent bigger than it was before the crisis, unlike many other advanced economies which shrank and aren’t yet back to the starting line.
All of this just underscores the importance of getting the big calls right when it comes to the financial system, as well as the broader economy. The IMF has just strongly endorsed our action to secure the financial system during the GFC in its Financial Sector Assessment Program. Since the crisis, we’ve been working through global forums to meet new Basel III capital and liquidity requirements for our banking system. We’ve also made substantial investments to support the residential mortgage-backed securities market and through it, of course, banking competition.
But one of the most important areas where we’ve acted is also one of the least understood by many people. Since before the GFC, the government has been taking measures to ensure that the market for Commonwealth Government Securities (CGS) remains liquid and efficient. The crisis highlighted how important these measures were – with liquidity in financial markets like the interest rate swaps market profoundly constrained, the AAA-rated CGS market and its associated futures market was at times the only option businesses had to hedge their interest rate risk and lower their cost of capital.
Given its central importance to the financial system, the government has had a long-standing commitment to maintain liquidity in the CGS market as we return the budget to surplus and pay down net debt. Because, as anyone who understands the most basic principles of budget accounting understands, you can maintain an appropriately-sized bond market while also paying down net debt – this can be done by investing the proceeds in safe and liquid investments so they are counted as an offsetting asset. That’s why I was so alarmed to hear Andrew Robb, the guy who actually wants to be finance minister, say he’d basically shut down the CGS market. As was pointed out by several well-respected market commentators, that would be ‘madness’ which would profoundly dislocate Australia’s financial markets and have huge costs for the Australian economy.
That’s why a couple of years ago, the government consulted an expert panel of financial market participants and our regulators to advise on the appropriate future size of the government bond market in light of the government’s strategy to return the budget to surplus and pay down net debt, plus the increase in passive safe haven investors in our CGS and our banks’ greater requirement to hold CGS under Basel III.
Of course, it’s great to see Andrew Robb is now supporting the government’s reforms to build a deep and liquid corporate bond market. As I’ve said for some time now, a vibrant corporate bond market is critical to putting competitive pressure on bank lending rates to business, and to harnessing our national superannuation savings so we can domestically fund more productive investment in our economy, via both the banking system and the corporate sector, reducing our reliance on offshore wholesale funding markets.
In particular, it’s good that Mr Robb has acknowledged the legislation we’ve already passed to make it easier for retail investors to buy CGS. Allowing CGS to trade on a securities exchange will provide retail investors with a more visible pricing benchmark for investments they may wish to make in corporate bonds issued by Australian businesses, as well as help further encourage retail investors to consider diversifying their savings through investments in fixed income products like government and corporate bonds.
I don’t even mind that Mr Robb flogged his ‘ideas’ to streamline disclosure and director’s liability for retail corporate bond issuance straight from the government’s discussion paper, which is available on the Treasury website.
Reforms like this to promote a domestic corporate bond market are vital to securing the long-term safety and sustainability of our financial system, building Australia as a leading financial services hub and boosting our reputation as one of the most attractive investment destinations in the world.
But what I am deeply concerned about is that Mr Robb has inexplicably asserted that one of the main reasons we need a deep and liquid corporate bond market is because a Liberal government would shut down the CGS market, which would impose huge costs on the Australian financial system and our whole economy.
With so many jobs and livelihoods on the line, I genuinely hope he reconsiders his position.
Wayne Swan is deputy prime minister and federal treasurer.