Trader Joe doles out the goodies
Funny thing though about that $8.8 billion cheque – the RBA didn’t particularly want it..as Michael Pascoe commented last week.PT2M33S http://www.canberratimes.com.au/action/externalEmbeddedPlayer?id=d-2wd68 620 349 October 29, 2013
Reserve Bank governor Glenn Stevens has effectively confirmed that Joe Hockey is blowing several hundred million dollars in an attempt to make his performance as Treasurer look good. Never underestimate the vanity of politicians.
Forget a few thousand here and there on the cost of weddings and Cairns “meetings”, Hockey’s petty budget politics will cost tax payers about $300 million over the next 12 months and another couple of hundred million the next year.
What budget crisis? ... Joe Hockey. Photo: Alex Ellinghausen
In a speech at a Sydney investment conference this morning, Stevens backed up comments by the RBA deputy governor last week that the bank was happy to rebuild its capital reserves over time. The RBA certainly didn’t ask for Hockey’s $8.8 billion capital injection and didn’t think it was necessary.
That’s the extra $8.8 billion the government is having to borrow and pay interest on while blowing out “Labor’s” 2013-14 budget deficit by the same amount.
In the careful phrasing that characterises the Reserve Bank, Stevens today went further than his deputy. Reduce the three concluding paragraphs of his speech to bullet points, this is what you get:
- The Australian dollar is going to fall.
- The Aussie’s rise shrank the value of the RBA’s foreign reserves and, therefore, the bank’s capital by more than the bank thought prudent. (By implication, a falling Aussie will boost the RBA’s foreign reserves.)
- The RBA wanted to rebuild its capital over several years by retaining its profits and not paying the government dividends.
- Hockey’s $8.8 billion injection this year means dividends will be paid to the government over the next few years.
But don’t take my word for it. Here’s how Stevens explains Hockey’s borrowing binge:
“The high exchange rate has also had a significant impact on the Reserve Bank's own balance sheet. It led to a decline in the value of the Bank's foreign assets and hence a diminution in the Bank's capital, to a level well below that judged by the Reserve Bank Board to be prudent. This has been a topic of some interest of late. Our annual reports have made quite clear over several years now that, while this rundown in capital in the face of a very large valuation loss was exactly what such reserves were designed for, we considered it prudent to rebuild the capital at the earliest opportunity. It has been clear that the Bank saw a strong case not to pay a dividend to the Commonwealth during this period, preferring instead to retain earnings, so far as possible, to increase the Bank's capital. That rebuilding could in fact have taken quite a few years, given the low level of earnings.
“That is the background to the recent decision by the Treasurer to act to strengthen the Bank's balance sheet, in accordance with a commitment he made prior to the election. The effect of this is that instead of it taking many years to rebuild the capital, it will occur in the current year. This results in a stronger balance sheet on average, and makes it likely that a regular flow of dividends to the Commonwealth can be resumed at a much earlier date than would otherwise have been the case.”
So “Labor’s” deficit blows out to about $40 billion this year, but Hockey’s heroic efforts to reduce the debt in the years ahead will be enhanced by a rich stream of dividends from the RBA. The last time the Aussie had a sharp fall, the RBA paid the government a dividend of more than $5 billion. Trader Joe is playing the forex market with borrowed money.
Last week the RBA deputy governor, Philip Lowe, said the level of the bank’s capital reserves had not been keeping him awake at night. The board had wanted to rebuild the capital level over time but the government wanted to do it immediately.
The official line from the Treasurer is that he found the world to be a dangerous place on his trip to Washington. Today Glenn Stevens said:
”There was a distinctly more relaxed tone to the discussions in and around the IMF and G20 meetings in Washington in October than there had been at like meetings earlier in the year.”
At the current five-year commonwealth bond yield of nearly 3.4 per cent, the borrowed $8.8 billion will cost taxpayers about $300 million a year. In opposition, Hockey used to make a big deal about the interest bill being racked up by government debt.
If Trader Joe’s forex bet pays off, it will all work out in the longer term, but forex is a notoriously dangerous game. As far as can be told from the “you don’t need to know” government, Hockey’s bet has not been on the advice of Treasury or the RBA.
Michael Pascoe is a BusinessDay contributing editor