Global crisis as shares crash

GLOBAL financial markets have slid into a crisis of confidence, with depositors reportedly pulling their money out of banks in Greece and Spain, and Australia's share prices crashing yesterday in their biggest fall of the year.

More than $110 billion has been wiped off the value of Australian stocks in May, with $35 billion stripped from share values yesterday alone. The ASX/S&P 200 index fell 2.7 per cent or 131 points to close at 4026.5, its lowest level for six months.

The Australian dollar fell briefly below US98? before closing local trade at US98.18?, also a six-month low. It has fallen 9.25 per cent since the start of March, amid growing concerns about recession in Europe and a slowdown in China.

Gloomy data from China sent markets down further yesterday afternoon. Official figures showed home prices falling in 46 out of 70 cities surveyed and stockpiles of unsold cars rising sharply. Goldman Sachs lowered its June quarter growth forecast from 8.6 to 8.1 per cent, while economists from the China's State Information Centre forecast growth to fall to 7.5 per cent.

Federal Treasurer Wayne Swan last night issued a reassurance that prospects for Australia and the region remained healthy. But Mr Swan spent much of the afternoon and night on the phone with other finance ministers, debating what steps could be taken to restore confidence.

Australia is seen by global markets as a fair-weather investment. Money piles in here when times are good, and moves out when times are bad.

The plunge so far bears no comparison to the panic of September 2008, but with no light showing in Europe's tunnel, the future is uncertain.

Financial markets believe the Reserve Bank board will deliver another interest rate cut to restore confidence when it meets on June 5. It remains to be seen whether the banks will pass on all the cut to customers.

ANZ bank chief Mike Smith said Australian banks were still able to raise finance on global markets. ''European funding markets are essentially closed at the moment because of the uncertainty in Europe, however Asian and US markets remain open'', he said. ''Australian banks are well placed right now''.

Mr Swan said Australia's fundamentals remained solid.

''We have rock-solid public finances, one of the strongest financial systems in the world, low unemployment, solid growth, a massive pipeline of investment over long-term horizons, a reaffirmed AAA credit rating from all three global ratings agencies, world-class regulators, and a proven track record of dealing with global instability,'' he said.

Yesterday's market plunge was part of a global slump, after a report that nervous investors in Spain withdrew more than ?1 billion on Thursday from the troubled Bankia group.

The Spanish government, which has taken over the bank, denied the report, but shares in Bankia slumped 30 per cent.

Earlier, the head of Greece's central bank said depositors had taken ?700 million (about $A900 million) out of Greek banks after the May 6 election left the country without an elected government.

A run on the banks would create a serious risk that the European crisis could spiral out of control. The Greek crisis has left no one in charge, just a caretaker government that has no ability to borrow the funds its banks might need to survive.

Overnight in Europe, Moody's cut the ratings of 16 Spanish banks, citing the country's deepening recession and increasing losses on real estate loans. Fitch Ratings dumped Greek government bonds into a C-class rating, saying the Greek election results showed a lack of public and political support for the austerity pact the previous Greek government had negotiated with European authorities.

Investors are retreating from sharemarkets to park their money in safe places, such as government bonds, where their capital will remain intact even if the yield is low.

On Wednesday, the Australian government sold a new tranche of 10-year bonds at a record low yield of just 3.36 per cent, compared with 5.48 per cent a year ago. But yesterday the demand for bond futures was so intense that the implied yield sank to 3.035 per cent.

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Markets rocked by euro chaos

INVESTORS nervous about Europe and the slowing global economy have wiped $27 billion from the value of Australian shares - as the chairman of BHP Billiton warned that the nation's mining boom was winding down.

Sharemarkets around the world quaked amid growing speculation that Greece would be forced out of the euro bloc, triggering a new bout of global financial instability. In Australia, investors pulled their money out of shares, sending the market on its biggest fall of the year.

By the end of yesterday, the benchmark ASX/S&P200 index had plunged by 101 points to 4165.50. The Australian dollar sank below 99 US cents for the first time this year.

More than $75 billion has now been stripped from the value of Australian shares this month - mostly over Europe concerns, but also because growth in China and India has slowed, easing demand for our mineral exports.

Trade figures released last week imply that imports of capital equipment shrank in the March quarter, and have barely grown in the past six months. This suggests growth in business (mostly mining) investment is slowing sharply.

Yesterday's fall began as soon as markets opened in the wake of more bad news from Greece. Negotiations to form a new government failed again, forcing a second national election.

New data showed Greece's GDP shrank by 6.2 per cent in the year to March, amid reports that European and German leaders want Greece out of the eurozone, and are ready to risk a market meltdown.

There was a brief rally when new data showed Australian wages growth remains subdued - except in Western Australia, and in mining - but the market started falling again after BHP chairman Jac Nasser said the resources cycle had turned, and that BHP would shelve some of its planned projects.

''The tailwind of high commodity prices has contributed to record growth in the sector and the country,'' Mr Nasser said in Sydney. ''Now we have a period where those tailwinds are moderating, and we expect further easing over time.

''The resources business has always been, and will always be, a cyclical business.''

Asked if BHP still planned to invest $80 billion over the next five years, he responded: ''No.''

In a politically charged speech, Mr Nasser, the Melbourne engineer who became Ford's global chief, called for a new wave of industrial relations reform, saying that in 2011 BHP faced 3200 cases of industrial action in its Queensland coal business alone.

He warned that Australia had become ''one of the higher cost countries of the world''. Its industrial relations environment was deteriorating, governments had hiked mining taxes and royalties, and investors had lost confidence in the future of the global economy.

''Those decisions have repercussions,'' Mr Nasser said. ''At BHP, our choices include in which product ? and in which country we choose to invest.

''Stable tax and appropriate industrial relations frameworks ? we will make progress if we focus on getting these two issues right.''

He censured Treasurer Wayne Swan for his attacks on mining billionaires, and urged him to create ''a stable, predictable and competitive tax framework''.

''I cannot overstate how the level of uncertainty about Australia's tax system is generating negative investor reaction,'' Mr Nasser said. ''I don't think it is good for Australia when global investors question openly whether Australia really wants a globally competitive resources industry.''

But the slide in the dollar is giving relief to thousands of Australian businesses, as it was mostly the dollar's rise that made them (and BHP) high-cost.

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Shaky sharemarket fails to stir economy

THE Australian sharemarket is being thrown down, then up, as fear and hope fight it out on the global stage. But what does this mean for our economy?

Most likely, not much. Markets plunge and soar, but the economy is doing neither. All this year it's been muddling along, stuck in second gear. And it will probably keep on muddling along in second gear.

You wouldn't guess that from the sharemarket. At one point yesterday, a fortnight of fear and panic had wiped about $240 billion off the value of Australian stocks and knocked trillions of dollars off global wealth. That's a big hit.

But then, sharemarket money is not real, unless you're selling. The benchmark S&P/ASX 200 index hit 6829 in late 2007, sank to barely half that in early 2009, rebounded to just under 5000 last April, then started leaking slowly, until fears over the parlous fiscal state of US and European governments turned leak into flood.

The S&P/ASX 200 index closed at 4603 on July 22, then started sinking. By Monday it dropped to 3986, then yesterday to 3766 before abruptly flying back up to close at 4035. Traders attributed the rebound to heavy buying in their own markets by the Korean and Taiwanese governments.

That's probably not the strongest basis for a rebound in Australia or anywhere else. This play could have many scenes left. Confidence is fragile, and global confidence will stay down until there is firm ground to support it.

Last week's debt deal in the US was essentially a decision by the Republicans to keep the US from defaulting on its debts, but to block any long-term correction to the US government's unsustainable fiscal course while President Barack Obama is in office.

The markets, and ratings agency Standard & Poor's, saw this as a road to ruin. The Republicans set down markers (such as preserving tax loopholes) which would equally prevent a Republican White House from getting the US back on track. The markets were falling fast even before S&P stripped away Uncle Sam's triple-A credit rating.

About time, we Victorians might say. Remember how in the '90s, the ratings agencies demoted Victoria two notches  when even under the financial foot-binding of the old Loan Council rules there was no risk of Victorian governments defaulting on debt payments?

Yet last week, the US House of Representatives went to the brink of voting for such a default.

S&P has started to apply the same rules to the US as it applies in rating other governments. It knew this would lead to turmoil on financial markets, but judged it better to pull the plug now than to keep up the pretence that buying US securities is risk-free.

Bill Gross, who runs the world's biggest bond fund, PIMCO, applauded. "S&P demonstrated some spine," he said."They spoke to a dysfunctional political system . . . they finally got it right."

Fiscally, Australia is a sharp contrast to the US. Its net debt is only 6 per cent of GDP and projected to be back in the black next year. That might prove optimistic; growth is unlikely to be as strong as Treasury projects. But as former Reserve Bank board member Warwick McKibbin puts it, "surpluses are not the be-all and end-all of policy". If things do go wrong, Australia has one of the few Western governments in a position to respond a second time.

Whether things go wrong for us will depend more on what happens in China than in the US or Europe.

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Garnaut's got the goods on mining taxes

QUESTION 1 is whether the slump in global markets is a crisis or a correction. Are we seeing a second wave of the panic of late 2008, or just seeing investors retreat from positions that now seem too optimistic?

Question 2 is whether the resource rent tax will damage foreign investors' long-term confidence in Australia, and hence our future growth.

The two questions are inter-related. The mining companies and their supporters tell us the plunge in mining share prices is the result of the new tax. And as we all indirectly own shares in the mining companies through our super funds, we're all worse off.

Let's put the facts. When the markets closed on Friday, April 30, the Australian dollar bought US93 and the benchmark S&P/ASX200 index stood at 4807.4.

On the Sunday, the government released the Henry report and announced it would impose the resource rent tax.

The next day, both the dollar and the market index fell, but slightly, by 0.5 per cent. Over the next two weeks both slid by roughly 4 per cent. That's a fall, but no cataclysm.

The real damage came in week three. By last Friday morning, the dollar had plunged 9.7 per cent in four days and a bit, and the sharemarket by 8.7 per cent. That's a market plunge. But then they kept rising.

The important thing is that this was not unique to Australia. Sharemarkets worldwide have fallen by similar amounts over the same period. Mining stocks in the US fell by similar amounts to mining stocks here.

The Aussie dollar fell more than most against the US dollar, but there are other reasons for that.

Commodity exporters such as Australia have manic-depressive currencies: they rise higher and fall lower than the rest when the outlook for global growth changes. Back in 2008, we went from US97.86 in July to US61.22 in October. Now forecasts for global growth have fallen, with Europe facing years of slow growth and China slamming on the brakes to head off inflation.

Second, the crisis in Europe has reversed the market's bets on what the Reserve Bank will do next. A month ago it was forecasting several rate rises ahead. Now it's punting on rates staying on hold until the second half of 2011. And that has halted the carry trade, in which investors borrow in Japan or the US at low interest rates to invest in Australia.

Third, Australia plans to impose a resource rent tax on miners, reducing the profitability of mining projects. All three are factors in our falling dollar and share values. Yet Australian shares have fallen at similar rates to the rest and bank shares have fallen as much as mining shares. To me, that suggests the new tax has been only a marginal influence.

What of the future? Your guess is as good as mine, but most analysts see this as more correction than crisis, at least outside Europe.

Asia's biggest markets are growing at incredible speed: China, Taiwan, Thailand, Malaysia and Singapore all grew by more than 10 per cent in the year to March, with South Korea and Hong Kong not far behind. That momentum would take some stopping. And the Federal Reserve is forecasting US growth of 3.2 to 3.7 per cent this year. Europe alone is in trouble.

What about us? With an election looming, it's no surprise that the mining companies have put projects on hold. I suspect they will stay on hold until the election is over and (if Labor wins) the new tax becomes law, with the support of the Greens, who will hold the balance of power in the new Senate.

In the short to medium term, you'd expect that it will lead to less mining investment than otherwise. Mining Australian deposits will become less profitable, and in some cases those projects will drop down the priority list of the multinational miners. But as I have argued before, that simply defers those projects until they become more profitable. Our mineral despots will not be moved. Coal aside, they will all be mined eventually. And the government is right to demand a better return for them.

But how? A consensus is starting to form around a sensible compromise, well-expressed last Thursday in a thoughtful, fair-minded speech by Professor Ross Garnaut at the University of Melbourne. Decades ago, Garnaut and Anthony Clunies-Ross invented the resource rent tax we now use for the oil and gas industry. Garnaut is also the long-time chairman of Lihir Gold, and has worked closely with both the Rudd government and Rio Tinto. No one knows the issues better.

There is no space to summarise his speech here: for those interested, it's at www.theage.com.au. Garnaut chastised his fellow miners for using emotive arguments and threats rather than logic, and upheld the government's right to impose it on existing as well as new projects.

But he also questioned Treasury's assumptions that mining companies could borrow money at the same rate as the government to finance their initial losses, and that future governments would honour the pledge to pay mining companies 40 per cent of their losses on failed projects.

A better solution, he argued, would be to use the Henry formula to tax mining exploration, and put his own long-established (and less extreme) tax on mining production. It's the logical solution. Pity they won't agree on it any time soon.

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