THE DISTILLERY: A watchdog purrs

Today we get a taste of the 2010 economic conundrum. Soaring asset markets collapsing as fiscal and monetary supports are withdrawn. Can the private sector hold itself up?

Peter Martin of The Age certainly thinks so. According to Martin, "...you've got to hand it to the Federal Chamber of Automotive Industries. It knows when to stop...After enjoying its biggest pre-Christmas sales bonanza as buyers from all over the country, who could even loosely describe themselves as businesses, raced against the clock to take advantage of the government's 50 per cent business investment tax break, it said 'thanks', but no more. 'This was game-changing. It restored confidence in the marketplace and stimulated additional demand,' said Federal Chamber of Automotive Industries chief executive Andrew McKellar.”

Martin goes on to castigate the Real Estate Institute of Victoria and an "audacious" press release in the past week entitled 'Success of first home buyer assistance shows it should continue'. He also takes aim at the Association of Superannuation Funds, [which] is heading down the same path. In a creative announcement headed 'Make budget provisions now and end speculation for a super 2010', it says...the government should lift compulsory superannuation contributions to 12 per cent in the May budget.

This column agrees that the corruption of vested interests is always a danger in government stimulus programs and must be watched carefully. Martin makes a solid point. He concludes, inevitably, on the banking cartel, stating "now that the crisis has passed, the government has no duty to protect the profits of banks...Expect an announcement in the budget or during the election campaign about a new government-sponsored competitor that will offer banking services through branches of Australia Post. The new head of Australia Post, Ahmed Fahour, once ran NAB's Australian operations”. This column supports government reshaping competition.

But one wonders why Martin is announcing this now. The Fahour appointment is almost a month old. It doesn't appear that the commentary is based on a confirmed leak about Australia Posts' plans or surely the paper would have headlined the story. Nor does Martin work through the implications of a Post bank. For instance, how will it attract funding without damaging big bank deposits? This in turn will put more pressure on wholesale debt issuance and retention of the government guarantee thereof (which Martin makes no mention of). Hardly the end of all troughs.

Meanwhile, the government guarantee on wholesale funds does enter the eye of that hideous beast, the Australian Financial Review editorial. Having all but ignored the bailout of banks for twelve months, the animal opens its hypocritical throat and roars for "a timetable to scrap the guarantee sooner rather than later.” This column resents the guarantee. But it is not such a fool as to think that global credit markets have returned to normal. The AFR's argument that other countries have dropped or are about to drop their guarantees is irrelevant both to those countries funding profiles and Australian conditions, where the stability of the bank-housing complex is entirely dependent upon external funding. The US Fed hasn't yet ceased its extraordinary support for mortgage markets and most serious analysts regard reforms to shore-up Wall St as grossly inadequate. Basel III reforms are still unclear, as are new APRA rules. We are still uncertain how the government will re-engineer competition for banks and, as stated above, what that means for funding paradigms. The AFR offers no evidence beyond the self defeating claim that "the banks drastically reduced their reliance on the guarantee in the second half of last year when Westpac...raised more than $9 billion of guaranteed debt”. Neither does the comment offer any ideas about how to remove it. Having marvelled at the AFR's silence on financial services reform for six months, this column is now grateful for it.

A different angle on emerging tensions for funding private versus public sector activity exercises Adele Ferguson at The Age, who overturns a Sydney Morning Herald front page story of the day before with a scoop that Sydney will indeed be building a Metro. According to Ferguson, it will be much larger than thought at a cost of $13 billion. Moreover, Ferguson reckons "After so many dud road-related public-private partnerships (PPPs), it seems the NSW government has realised that if it wants to build the Metro, it will have to find the money itself, or else overhaul the current model, which has burnt so many investors.” She makes a long sad list of toll road failures before fingering the problem: "Most projects get up because there are a lot of people with vested interests. To make the project look viable these people underestimate costs, overestimate revenues, undervalue environmental effects and overvalue regional development effects. Part of the problem lies with government. In each case, the state government chose the bid with the highest estimate on the grounds that it received a payment in advance, and, through the public-private partnership, had transferred the financial risk to the private sector.” Her solution is to "follow the lead of countries such as Britain, the Netherlands and South Africa, to reduce the risk of cost blow-outs.”

Falling victim to the news cycle, Ian Verrender of The Sydney Morning Herald also covers toll roads, or more to the point, tunnels. This column has noted before a lack of editorial coordination in the large papers.

John Durie of The Australian examines further private versus public sector funding tensions in his take on the state of the NAB bid for AXA. Durie makes the smart observation that "NAB's main aim...is to build a wealth management business that doesn't need wholesale funding like mainstream banking.” But he maintains, too, that: "NAB has the biggest ACCC hurdle, because it brings to the battle its market strength in bank lending to small business, which can translate into enormous market power...This is particularly important...On NAB's own figures, the AXA acquisition would secure 25.1 per cent of retail superannuation, with the next two having 17.7 per cent (AMP) and 13.6 per cent (CBA) respectively.” On the other hand, Durie reckons rightly that Craig Dunn's major challenge lies with ASIC: "The AMP camp could use this loss of exclusivity, the lapsing of its original proposal and other factors [on February 6th] as reasons why it can launch a new bid...Whether it does so is still moot, but should it come back with another bid, NAB will go straight to ASIC and/or the Takeovers Panel complaining about a breach of the rule about truth in takeovers.” Durie also reckons if "Dunn does make another offer, his credibility will take a beating...A credibility hit isn't life-threatening in the business world, where if luck falls your way you are measured against other criteria.” Ominously, Durie predicts the 'the ACCC will serve as a quasi-inquiry' into the state of financial services” – in lieu of a Son of Wallace.

Which brings us to the man himself, Graeme Samuel, Chairman of the ACCC and his op-ed in the AFR explaining the ACCC's approach to financial sector mergers. Samuel offers the party line on CBA-BankWest , that it was the GFC that made us do it. On Westpac-St George he declares the tie-up was considered "not...likely to substantially lessen competition”. Perhaps in the old world, but the merger was approved on August 13, 2008 and signed off by Wayne Swan on October 24. There had been an increasing seizure in securitisation markets for over a year. This is belatedly Samuel's concern now, "Until securitisation funding revitalises, the market for funds will challenge the competitive dynamic in the residential mortgage sector.” The ACCC maybe preparing the ground for an approval of NAB's bid for AXA because, as this column and Stephen Bartholomeusz of Business Spectator pointed out in December, it will mean a different funding profile and business strategy for one of the big four, to a degree protecting future competition. Samuel closes on a worrying note in this regard: "Although some inquiries might appear to address obvious issues, there is no substitute for sound evidence, adduced through thorough investigation and consultation.” If that's not advance bureaucratic ass-covering, this column has never seen it.

Closing out today's theme of the dance between public and private funding, this column must note a terrifying lack of analysis of Chinese authorities move to limit lending. There is something on offer from Robert Gottliebsen of Business Spectator this morning and Stephen Bartholomeusz assessed annual contract negotiations for iron ore yesterday. As does Alan Jury (Chanticleer) of the AFR today, though in broader background terms only. Both refer to bullish production figures for late last year. But a quick glance at the Baltic Dry index shows a peak in shipping rates at the time and subsequent collapse of close to 30 per cent. Neither assess the likelihood, causes or implications of a Chinese slowdown. Nor does anyone else. Australia desperately needs to boost its debate around China and its economy to accompany the gigantic bet we are taking on that country's endless growth.