THE DISTILLERY: Global worries

Including today, there are just four days to the end of the financial year, June quarter, the month of June and the June half year. So it's an important time for a lot of reasons: fund performance, tax, returns, losses, business calendars, diaries etc... and yet they don't seem to matter to our jotters as much. Like 2010, other issues grab the mind – Greece (and not a getaway holiday), the weak US economy, and locally it's the recovery from the damage caused by the floods and cyclones at the start of the year. But of all the issues that worry the world the most, it's the possibility that Greece could morph into a crisis much bigger than its puny economy would seem to indicate. 
 
Economics editor Ross Gittins wrote in The Sydney Morning Herald today: "The Bank for International Settlements is the central bankers' club. And central bankers don't warn of catastrophe if they really fear one's on the way. When things really are near crisis point, they are calm and reassuring. So this is the world's bank manager issuing wayward clients with a stern lecture on the need to mend their ways. The bank is saying, don't assume the problems are limited to Greece, Ireland and Portugal. The big North Atlantic economies – the United States, Britain and much of Europe – have huge, unsustainable levels of government debt, and should the financial markets lose confidence in those countries' efforts to get on top of their debts, another crisis is possible."
 
And the Financial Times reported this morning in its online edition that the Bank for International Settlements says: "Global economic growth must slow to curb inflationary pressure around the world, the influential central bankers' bank has warned, saying that there was little or no slack left for rapid non-inflationary expansion. In its annual report, the Bank for International Settlements said that with the scope for rapid growth closing, monetary policy should be quickly brought back to normal and countries should act urgently to close budget deficits. " 
 
Fairfax's Malcolm Maiden remained calm on Saturday about the impact  Greek debt default would have: "Greece alone would be a manageable disaster, however. Its economy accounts for less than a half percentage point of the world's output, and its total debt is only about €254 billion ($A344 billion). Of that, about €46 billion is held by the European Central Bank, a similar amount is held by Greek banks, foreign banks and other institutions mainly in France and Germany hold almost €100 billion, and about €56 billion is in the hands of other Greek residents, including pension funds. The global market should also be able to withstand a spread of the crisis to the next two bailout patients, Ireland and Portugal. Interest rate spreads over German government debt on Irish and Portuguese government debt have widened in the past month, as they have in Italy, Spain and Belgium."  
 
Eric Johnston wrote in the Fairfax broadsheets that: "Australia's big banks are ranked as some of the most profitable in the world while the sector continues to boast among the widest interest margins of its global peers. The findings, contained in the latest annual report of the Bank for International Settlements, are expected to rekindle the debate about the profitability of Australia's leading banks. Specifically, they are expected to go some way to countering the arguments of the nation's banks that they just come in at the middle of the pack when it comes to profits. According to the BIS study of the world's banking profits, the pre-tax profits of Australia's big four was the equivalent of 1.14 per cent of their total assets. This is ahead of the second-placed US banks on 1.02 per cent and more than four times the rate of profitability of British and German banks."

This morning Ross Gittins had another economics lesson for those who claim Australia has Dutch disease: "If ever there is a time when it is obviously stupid for rich countries to prop up their manufacturers against competition from developing Asia, it is now. The obvious way to maximise our lasting benefits from the resources boom is to let secondary industry take its chances and put all our effort into boosting tertiary industry – with all its clean, safe, well-paid, high value-added and intellectually satisfying jobs. And the obvious way to do that is to invest in a lot more education and training, thereby increasing the nation's human capital and the saleability of Australians' labour."
 
The Australian's economics editor, Michael Stutchbury wrote on Saturday: "Strong job gains pumped up real household disposable income by another 5 per cent in the past year. These best of hip pocket times should be generating consumer optimism, business confidence and encouraging strong governments to take tough decisions. Instead, Australian consumers and voters have been spooked by the financial crisis, bigger power bills, higher interest rates, government belt-tightening, the looming carbon tax, falling house prices, rising rents, a string of natural disasters, the flood levy, Canberra's minority politics and fears of another global crisis sparked by a Greek sovereign debt default or a US debt and dollar blow-up." Yes, we've heard it all before.
 
The Australian's editor at large, Paul Kelly, wrote on Saturday: "Put bluntly, the boom with its high dollar is punishing large swathes of manufacturing, tourism, education, services and construction. The alarm bells are sounding. Job losses are threatening. The new fear is rising unemployment in a range of sectors off the back of weak domestic demand, the legacy of natural disasters, rising costs and falling competitiveness." Alarmist stuff!
 
But all that was rejected by fellow Australian columnist George Megalogenis: "In the past four years, the Australian economy has created 880,000 jobs, 430,000 full time and 450,000 part time. In that period, which includes the last global financial crisis, our labour force has grown by one million people. The gap between jobs gained and jobs sought – minus 120,000 – was added to the existing pool of unemployed. Real wages are 2.2 per cent higher, which may not seem much across four years, but productivity is falling, so people are getting ahead without raising an extra sweat. We need to grow up and start thinking about how to build on our obvious successes. But that won't happen while Australia is cursed with a government without basic political literacy skills, an opposition that happily says whatever springs to mind when a microphone is pointed its way and a commentariat that finds new ways to talk down the last rich nation standing." Hear hear.
 
Michael Pascoe warned on smh.com.au about the dangers of politicians bearing tax cuts: "It is a little scary that the next federal election could become a repeat of the dreadful 2007 Howard vs Rudd competition, with both sides throwing harmful tax cuts at the voters. The danger would be that a victorious Tony Abbott might keep a big tax cut promise at a time when it would hurt rather than help us. Instead of again buying votes with tax cuts, we need politicians honest enough to address the looming explosion in health costs and age pensions as well as the need for a much bigger spend on education and infrastructure."
 
The Australian's Richard Gluyas says: "Major bank dividends are sustainable, despite offering an attractive 7 per cent yield and a strong premium to bond yields and the cash rate, a report by Goldman Sachs says. In a review of the sector's dividend paying capacity, the investment bank says the risk to payouts at the current, enticing level is that they can't be maintained, as in 2008-09 at the height of the financial crisis. Goldman examines three main concerns in relation to future dividends, including new capital requirements, lower loan growth and perceptions that payout rates are higher than global peers." 
 
The Financial Review reported: "Holden has warned the federal government that its future in Australia is under review because of concerns about sovereign risk." And the paper said "BHP Billiton is on track to complete its $US10 billion ($9.53 billion) share buyback program within days – six months early." 
 
Meanwhile, Fairfax's Adele Ferguson wrote this morning: "As the board of Foster's Group awaits the next move in the multi-billion-dollar takeover battle for the country's biggest beer company, two private equity operators are hoping some of the takeover dust washes their way as they crank up the search for a strategic partner for the alcopop group, Independent Liquor. In the case of Independent, it has been 4½ long years since Pacific Equity Partners and Unitas jointly acquired the alcopop maker, whose brands include Woodstock, Vodka Cruiser and Purple Goanna, for a massive $NZ1.3 billion ($1 billion), dramatically out-bidding trade buyers such as Brown-Forman, Lion Nathan, Diageo and Asahi." And the AFR reported this morning: "While SABMiller's indicative offer for Foster's was swiftly rejected by the Foster's' board, it reignited an intriguing battle between bankers that has simmered for a while." 
 
Fairfax's Ian Verrender wonders how The Australian and the ABC could make John Elliott out to be someone who didn't harm Foster's: "There were quite a few reasons John Dorman Elliott and his crew departed the Elders empire. The main one was debt. After the stockmarket crash of 1987 and an Elliott-led privatisation that went horribly wrong, the game was up. Foster's was carved out of Elders and listed as a separate entity and the wounded outfit limped along for years as it gradually paid down its crippling debts. Those minor details seem to have been forgotten this week. For there Elliott was, lauded on the front page of a national newspaper, bemoaning the fate of the company he once ran. And on good old Aunty ABC radio, he was introduced as '' the man who nurtured Foster's''. Uh, come again? Nurture? There are a great many verbs in the English language that have been employed during the past 20 years to describe old Long John's treatment of Foster's. To the best of my knowledge, nurture has not featured prominently among them." Good column.
 
The Australian's John Durie wrote on Saturday: "Most attention in Monday's court case over the financial problems of Centro Properties will focus on directors' duties, but the group with as much to fear is the auditor, PwC, which, by implication, will be linked to the extent directors relied on its advice. PwC is not a direct party to the Australian Securities and Investments Commission case against the Centro directors but, to the extent to which the directors are deemed able to rely on their advice, will be of importance. The firm is, of course, a part of the class action against the company. At a time when new ASIC boss Greg Medcraft has come to the job preaching about gatekeepers' duties, this judgment may well illustrate his campaign perfectly."
 
The AFR's Chanticleer wrote on Saturday: "Every so often in financial markets someone comes along and blows the whistle on a company that for all intents and purposes is sound." 
 
The Australian's Matthew Stevens wrote on Saturday: "The wholly remarkable 56 per cent cost blowout of BHP Billiton's Worsley alumina expansion identifies a concert of concerns ranging from company-specific questions over the proficiency of project design and construction management to the nationally systemic consequences of our surging exchange rate, rising raw materials costs and resurgent wage inflation."
 
And Terry McCrann wrote in The Australian on Saturday: "The entire basis of the national broadband network has been exposed as fundamentally unsound by the "wireless non-compete" clause in the deal between NBN Co and Telstra. At its simplest, it's a clause that is completely unacceptable and arguably illegal. What would be, what was, objectionable with cardboard boxes should also be so with broadband services. Broadly, but simply and accurately, NBN Co and Telstra agree not to compete. Worse, NBN Co is actually paying Telstra for that agreement."  And the AFR wrote "Telstra's share price has tumbled 5 per cent since the $11 billion NBN deal was unveiled, but chief executive David Thodey is happy with the details."
 
But according to a report in The Australian this morning, Telstra has a very different view: "Telstra chief executive David Thodey has vowed to aggressively promote its wireless network, arguing the telco's agreement not to promote wireless internet as a substitute for the national broadband network is a minor constraint. Mr Thodey said the "anti-sledging" clause was "very, very specific". The clause is contained in Telstra's $11 billion deal with the NBN Co and the government to gradually disconnect its copper network and provide access to certain infrastructure for 30 years."
 
The Australian's Nabila Ahmed claimed that: "Perpetual's star stock picker John Sevior has refused to rule out a departure from the wealth management group following his six-month sabbatical, saying he is only half a chance to return. His comments came after Perpetual chief Chris Ryan last week confused clients by saying Mr Sevior would definitely return after his break. Contradicting Mr Ryan's assertions, Mr Sevior said yesterday that he could give no guarantees."
 
And The Australian also reports that: "Macquarie Real Estate founder Bill Moss is questioning the fee-charging regime of listed property fund managers as he immerses himself in the battle for control of the Charter Hall Office REIT. Mr Moss, who now chairs the company he founded, Moss Capital, argues property fund managers should have cut fees more than they have since the global financial crisis, given the poor performance of the listed property trust sector and rationalisation in the industry."