AUSTRALIA - INPUT FOR G-20

C O N F I D E N T I A L CANBERRA 000220

NOFORN
SIPDIS

STATE/EEB/OMA ALEX WHITTINGTON; TREASURY/IMB BILL MURDEN,
WILBUR MONROE, AND MARY BEASLEY; STATE FOR EAP/ANP AND
EAP/EP

E.O. 12958: DECL: 03/14/2019
TAGS: ECON EFIN AS
SUBJECT: AUSTRALIA - INPUT FOR G-20

REF: A. A. STATE 17502

B. B. CANBERRA 116

C. C. 08 CANBERRA 1036

Classified By: Dep EconCouns W Albright, Reasons 1.4 B, D


1. (C/NF) Summary: The top concern for the Australians
going into the G20 summit will be coordinated international
action to restore global confidence, bolster the stability of
the international financial system, and produce outcomes that
lead to tangible results. PM Rudd wants to coordinate with
G20 partner states to deal with non-performing assets and to
gain a political commitment to reform the IMF to gain greater
Chinese participation. He will also likely push for another
G20 leaders meeting later in 2009, to deal with nonperforming
assets and institutionalize the role of the G20 as the
primary vehicle for dealing with the financial/economic
crisis. The GOA is generally supportive of US efforts and
wants to work closely to ensure the London Summit is a
success. Australia's economy has slowed due to the economic
crisis, but remains for now in better shape than most OECD
economies. Its banks and financial institutions generally
remain sound; the GOA has made no financial injections into
banks, and has had to do relatively little to support its
financial sector so far. Australia publicly opposes
protectionist moves. The crisis has not impacted on
Australia's ability or willingness so far to stick to foreign
policy commitments such as its role in Afghanistan. End
summary.


2. (C/NF) The following, using reftel format, is a summary of
GOA views on the current economic crisis and the upcoming G20
London Summit, and how the crisis has affected the Australian
financial sector and real economy. Note that as of COB March
4 (Australia time),the exchange rate was A$1 = US$.633.


I. Objectives for the London Summit
-------------- --------------


A. In the run up to the London Summit, what are the issues of
greatest importance to the host government?


3. (SBU) The most important issues for the Rudd government
are restoring global confidence, bolstering stability of the
international financial system by, among other steps, dealing
with non-performing assets (including maintaining access for
credit-worthy borrowers to international credit, important
for Australia),and avoiding trade or financial
protectionism. The G20 is generally viewed positively in
Australia, in no small part because it gives Australia a
QAustralia, in no small part because it gives Australia a
voice in the debate.


B. Based on public comments made by host government
officials, what are the country's likely objectives for the
summit?


4. (SBU) Prime Minister Rudd has publicly urged the G20 to
adopt his plan to regulate the lending practices of financial
institutions, including: (1) requiring full disclosure of
balance sheet and off-balance sheet exposures; (2) requiring
banks and other financial institutions to build up capital in
good times as a buffer for bad times; (3) requiring
incentives "to promote responsible behavior rather than
unrestrained greed"; (4) better accounting rules; (5)
strengthening the IMF,s mandate for prudential analysis.


5. (SBU) In a March 3 speech before the Australian Chamber of
Commerce and Industry, Rudd said that at the London Summit he
would pursue shifting toxic assets off of the balance sheets
of banks, saying that isolating these
non-performing assets was the only way to restore the flow of
private credit and end the global recession. Rudd said that
GOA officials were working with G20 counterparts to
stress-test troubled banks to determine which were viable,
and said non-viable banks should be closed.


6. (C/NF) Rudd advisers say he recognizes that leaders
probably cannot come up with a solution to toxic assets in
April, and so believes there should be a second G20 leaders
meeting later in 2009 - which would also support his goal to
institutionalize the G20 leaders meeting as the main forum
for managing the economic/financial crisis, and thereby
assuring Australia a seat at the table. Rudd also wants to
secure a strong commitment to serious IMF reform as a way to
promote a larger and more positive role for China, and to
strengthen the ability of regional development banks to
promote financial stability, including ending geographical
criteria in filling senior positions. Rudd is concerned
about the implications of economic shakiness in Central
Europe and about the prospects for such instability occurring
elsewhere.


C. Are there desired outcomes that officials have identified
publicly?


7. (SBU) In his March 3 speech, PM Rudd said the challenge of
toxic assets "must be addressed" at the G20 summit, and that
design and implementation of plans to isolate non-performing
assets must be done in cooperation with other countries,
including emerging countries. Rudd listed the following
seven principals for dealing with toxic assets in banks:

- i. Stress test all "systemically significant" financial
institutions so publics and governments know whether they are
sound;

- ii. Close all non-viable banks;

- iii. Neutralize, quickly and using compulsion if necessary,
all toxic assets on bank balance sheets as US did in the
1980s S&L crisis, through publicly-funded insurance
mechanisms, or using public and private capital in other ways
to isolate and remove these non-performing assets;

- iv. Use a "transparent and simple formula" to derive prices
Q- iv. Use a "transparent and simple formula" to derive prices
for bad assets (no further details);

- v. Private and public sectors and IFIs work together to
achieve this outcome;

- vi. Recapitalize banks so they will lend and reopen
"arteries of credit"; and

- vii. Once recapitalized, banks must agree to maintain
regulated levels of lending in return for government support
through sovereign guarantees on deposits and/or interbank
lending.


8. (SBU) Australian banks have relatively little exposure to
such toxic non-performing assets, but rely on the ability to
raise capital internationally, and could suffer if the credit
crunch grows worse.


9. (SBU) The GOA will likely to argue for improved
reregulation of national and international financial actors
to ensure that systemic risk is reduced and that unduly risky
behavior by financial managers is not rewarded. Trade
Minister Simon Crean has also urged the G20 leaders to make
public commitments to renewed liberalization of international
trade, and to condemn protectionist actions that would reduce
international trade or financial flows.


D. Based on public information, what recommendations or
reforms might the host government suggest? For example, is
the host government proposing changes to international
financial architecture, reform of international financial
institutions, or advocating the creation of new international
bodies? Is the host government proposing additional
regulation of financial products or institutions, making
changes to existing regulatory standards, or advocating new
best practices?


10. (SBU) In addition to proposals for dealing with
non-performing assets, Rudd may propose that the G20 impose
new regulations to make credit rating agencies and research
houses subject to regulation aimed at restoring investor
confidence in complex financial products, paralleling a
similar move proposed by his government in Australia.

II. Impacts of the Global Financial Crisis
-------------- --------------


E. What are the host government's greatest financial market
concerns (providing more liquidity to financial institutions,
dealing with bad assets, injecting fresh capital, improving
housing markets, guaranteeing deposits, making trade finance
available, etc.)?


11. (SBU) Australia so far has not had to deal with
collapsing banks. The greatest concern for the Australian
financial market is that failure to deal with nonperforming
assets means that international markets will remain stalled.
International credit markets are a crucial source of
financing for Australian banks and businesses; if they remain
stalled, the lack of credit will hurt Australian demand and
damage the Australian economy. The GOA also fears that
Qdamage the Australian economy. The GOA also fears that
foreign banks may abandon Australia to deal with problems in
their home markets, reducing available credit here for
businesses.


12. (SBU) Following the collapse of Lehman Brothers, in
September 2008 the Australian Securities and Investments
Commission (ASIC) temporarily banned all short selling. Now,
covered short selling with disclosure is permitted except for
financial stocks; that ban is scheduled to be lifted on March
6, but it is possible fearing raids on Australia,s healthy
banks, that ban could be extended.


13. (SBU) The GOA to date has not had to rescue any
financial institutions, provide capital injections, or extend
credit lines. It did introduce in October 2008 a new deposit
guarantee on all deposits at authorized deposit-taking
institutions (charging a fee on deposits over A$1 million),a
move the GOA undertook in response to similar moves in other
countries to preclude any possibility of Australian banks
being disadvantaged. Fund management firms are not included,
and some are considering changing to ADI status to gain
access to deposit insurance. Similarly, the GOA has extended
a wholesale borrowing guarantee (for a fee) for Australian
banks to ensure they can still access foreign capital. The
GOA also announced increased controls for credit ratings
agencies and research houses.


14. (SBU) The Australian Securities and Investments
Initiative (ASIC) placed a ban on all short-selling in
September 2008. Since then it has been modified; covered
short-selling with disclosure is permitted for all but
financial stocks; the ban for financial stocks short-selling
is scheduled to end March 6, but with recent speculation
about whether foreign "predators" are waiting to pounce on
Australian bank stocks, another extension is possible.


15. (SBU) The GOA has increased funding for the financial
regulators, ASIC and the Australian Prudential Regulatory
Authority (APRA, the prudential regulator for the financial
services industry, with the goal of ensuring banks, insurance
companies and other financial institutions can meet their
obligations and provide a stable, efficient and competitive
financial system). APRA, with ASIC, have been considering a
principals-based approach on executive remuneration, focused
on the structure of executive pay and on the incentives built
into compensation plans. It will seek to encourage behavior
by management that supports the interests of beneficiaries -
depositors, policy holders, retirement fund members. (08
Canberra 1266)


F. What are the most important impacts on the host country's
financial sector (what specific financial institutions have
failed, which ones have had liquidity/solvency problems, has
domestic lending to the corporate sector been affected, etc.)?


16. (SBU) No Australian deposit-taking financial institution
has failed in recent years. Highly leveraged investment
Qbank/infrastructure investor Babcock & Brown, already in
financial difficulties due to high debt levels in early 2008
before the global financial crisis intensified, has all but
collapsed. Its shares have been delisted and it is seen as
"doomed." Babcock & Brown has renegotiated a debt program
with its bankers that gives it up to three years to sell its
assets. Macquarie Bank, Australia's other large investment
bank/infrastructure investor, is healthier; it projects
profits for 2009. B&B's collapse does not pose risk to the
Australian financial sector, which to date remains sound.
The GOA is concerned about "financial protectionism," i.e.
foreign banks pulling out of Australia to deal with problems
in their home markets, thus further reducing the availability
of credit here. GE Money and GMAC both abruptly abandoned
their Australian auto financing businesses in October 2008
(GE Money also stopped making loans for houses and small
businesses),causing the GOA to scramble to find ways to fill
the gap to prevent further damage to Australia's troubled
auto manufacturing and sales sectors (Toyota, Ford, and local
banks picked up much of the business).


17. (SBU) As in other countries, there are evidence and
anecdotes about credit-worthy Australian businesses finding
it harder to access capital, although post-September 2008
capital expenditure by Australian businesses has so far
remained surprisingly quite strong.


G. What initiatives has the government taken in response to
the financial crisis (has the government rescued financial
institutions, provided capital injections or credit lines,
changed its deposit insurance guarantees, provided interbank
guarantees, established asset purchase programs, trade
finance, etc.)?


18. (SBU) The October stimulus package temporarily increased
the GOA first-time home buyer credit, which the Housing
Industry of Australia credits with improving housing sales in
December and January. Australian metropolitan housing prices
were, with the exception of Perth, already cooling off
following an early housing boom in Australia.

III. The Broader Economic Crisis
-------------- --------------


H. What are the most important impacts on the host country's
real economy? What steps has the host government taken to
mitigate the effects of the crisis?


19. (SBU) In August 2008, the Australian economy was booming.
Unemployment was low, labor market participation levels were
at record highs, the government budget surplus was A$22
billion, commodity prices were very high, and the GOA was
projecting 3% growth for Australian FY 2009 (July 1-June 30).
In figures released March 4, the Australian economy
contracted 0.1% in the December quarter (0.5% seasonally
adjusted),following growth of 0.1% in the September quarter.
Unemployment has begun to creep up, business and consumer
confidence is receding, and commodity prices have plummeted.
Because of its strong position entering the global economic
crisis, Australia,s numbers still look comparatively good,
but the GOA and Australian public and businesses are
understandably concerned, especially with recession or
severely curtailed growth in seven of its top ten trading
partners, including the top four trade partners China, Japan,
the United States, and New Zealand.
Qthe United States, and New Zealand.


20. (SBU) The GOA has passed two stimulus packages since the
global financial crisis intensified in September 2008.
Rudd,s government moved quickly to propose and pass the
first one in October 2008 (08 Canberra 1036),totaling A$10.4
billion, roughly 1% of GDP. Key elements included A$4.8
billion in lump sum payments to pensioners, caregivers, and
retirees, plus A$3.9 billion in payments to low- and
middle-income families with children, paid on December 8
immediately before the Christmas and Australian summer school
holidays. The plan also increased grants for first-time home
buyers, and included A$4.7 billion for rail, roads, and
education infrastructure.


21. (SBU) The second stimulus package, totaling A$42 billion
(about 4% of GDP) was announced on February 3. It will be
directed into education and community infrastructure, public
housing, business tax breaks and one-off cash payments to low
and middle-income households, farmers, single-income families
and students.


22. (SBU) Australia can fund these measures. Entering the
current fiscal year (July 1-June 30),the GOA projected a
A$22 billion budget surplus. With spending up and revenues
down, Australia will end up with a budget deficit, but the
GOA still has room to implement further stimulus measures
should it so decide.


23. (SBU) In addition, the independent Reserve Bank of
Australia (RBA),which was primarily concerned with inflation
in early 2008, has moved very aggressively, slashing its
prime cash rate by 400 basis points between September and the
first week of February. The cash rate now sits at 3.25%, the
lowest in Australia,s modern economic history, so the RBA
still has room to move.


I. What has been the impact on trade, trade finance, and
employment in export-oriented sectors? Are there problems
financing exports and/or imports? If so, in which sectors?
How is the host government attempting to address these
problems?


24. (SBU) Seven of Australia's top ten trading partners are
in recession. The Australian Bureau of Agricultural and
Resource Economics (ABARE) this week released its predictions
for 2009-10. Australian commodities exports are predicted to
fall 17% in 2009-10, and export earnings from minerals are
forecast to fall 22% in 2009-10. ABARE sees a fall of 34% in
energy exports earnings, driven by lower forecast prices for
oil and coal. There have been layoffs in the mining,
automobile, textile, and financial sectors. Australian
tourism has disappointed; despite the deep depreciation of
the Australian dollar, tourism has not picked up because
Australia,s top tourism markets (Japan, China, US, Europe)
are all in downturns.


25. (SBU) There has been no significant issue in financing
exports or imports. The GOA wholesale fund guarantee has
helped banks access credit on the international market.


J. How has the crisis impacted the host government's outlook
on trade and investment? Has there been a perceivable shift
in how the government and population view the benefits of
international trade? Are political pressures growing for
Qinternational trade? Are political pressures growing for
protectionist policies? Are measures being taken or
contemplated that would impose costs on other countries in an
attempt to meet domestic needs (e.g., tariff hikes, import
licensing or other trade restrictions on, or discrimination
against, foreign investors)? Is the host government
considering capital controls? On the other hand, is the host
government considering easing investment restrictions in an
effort to encourage foreign investment?


26. (SBU) Recently there have been calls by some unions for
"Buy Australia" procurements or similar protections,
especially in the wake of the late February decision by
clothing manufacturer Pacific Brands to move its
manufacturing operations to China at a cost of 1850 jobs in
Australia.


27. (SBU) The Rudd Government has not echoed such calls nor
proposed such policies, and has stuck to its free trade,
pro-investment rhetoric. It has denounced other countries'
moves towards protectionism, urging all to observe their WTO
commitments and not repeat the errors of the 1930s. It has
emphasized its support for the WTO and moves to revive the
Doha Round. On February 27, Australia signed a new
multilateral FTA with New Zealand and the members of ASEAN,
trumpeting this as a commitment to trade that will help the
recovery from the current economic slowdown.


28. (SBU) Despite the calls by some unions, there is little
political pressure for an increase in protectionism in
Australia; the opposition Liberal Party also supports free
trade. No controls on international capital flows are being
considered; Australia relies on international capital and has
denounced such proposals elsewhere. Australia has a
wide-open investment regime and although "national interest"
grounds exist that allow the GOA to reject investment
proposals, such rejections are very rare. However, recent
moves by state-owned Chinese companies to invest in
Australian mining companies including Rio Tinto and Oz Metals
beyond the threshold currently permitted will present the GOA
will a tough decision on whether to relent on its policy of
not allowing state-owned companies to hold a seat on a
corporate board (required under Australian law at 15% or
higher level).


29. (SBU) Several vulnerable sectors have been identified.
Australia's automobile manufacturing sector was troubled even
before the economic crisis intensified. The GOA announced a
plan on November 10 totaling A$6.2 billion for the auto
industry, which seeks to generate more private investment and
to encourage the production of "green" cars. All three
remaining domestic manufacturers - General Motors/Holden,
Ford, and Toyota - have received funding. However, the GOA
has stuck to its commitment to reduce tariffs on auto imports
from 10% to 5% in 2010.


30. (SBU) In January the GOA in conjunction with Australia's
Big Four banks announced a A$4 billion plan for the
commercial property sector. The plan is designed to support
Qcommercial property sector. The plan is designed to support
the construction sector and to cap Big Four banks' financial
exposure to commercial property projects. It also is
intended to help fill any potential gap should foreign banks
not renew their loans due to problems in their home markets.


K. Do financial sector/industry bailouts or stimulus packages
have local preferences? Is the government acting to
influence the value of its currency (for example, to improve
export competitiveness)?


31. (SBU) The two stimulus packages have no local preference
provisions. The state of Victoria announced in November it
would draft a new infrastructure plan that will include some
local (Australia and New Zealand) preferences for small and
medium enterprises, which Victoria says will comply with
government procurement obligations under the US-Australia
FTA. The deposit guarantees are available to foreign as well
as Australian authorized deposit-taking institutions.


32. (SBU) The Australian dollar has declined dramatically,
from a peak in July 2008 of US$.985 to its current level,
US$.633, tracking declines in international commodity prices.
Far from trying to devalue the Australian dollar, the RBA
has intervened to prevent the Australian dollar from
declining further.

IV. Near-term Outlook and Political/Foreign Policy
Ramifications
--------------
--------------


L. How has the outlook for growth, inflation, the current
account, exchange rates, and the budget deficit changed? What
are the biggest economic challenges facing the host country
in the coming months and year? How is this crisis expected
to affect employment?


33. (SBU) Growth for the current fiscal year (July 1-June 30)
was originally projected to be 3.0%. The December quarter of
2008 saw GDP decline 0.1% (0.5% seasonally adjusted)
following anemic 0.1% growth in the September quarter, and
many observers expect Australia will enter into recession in
the current quarter. The current account has actually
improved slightly. In figures announced this week,
Australia's current account deficit improved from A$9.4
billion to A$6.5 billion in the December quarter, and the
surplus on goods and services improved from A$1.4 billion to
A$4.1 billion, because a large decrease in imports swamped a
smaller drop in exports. The Australian dollar has declined
dramatically, from a peak in July 2008 of US$.985 to its
current level, US$.633, tracking declines in international
commodity prices. Australian business prefers a range of
around US$.75-.80 for the Australian dollar.


34. (SBU) Unemployment has edged up to about 4.6%, but will
definitely rise, with some predictions it could hit 8-9%
later in 2009. The GOA has passed measures to fund continued
training and apprenticeships with companies, hoping to
prevent additional lay-offs and seeking to take advantage of
the slowdown to improve skills. Australia's unemployment
benefits are funded in the federal budget through income
taxes. The GOA has had no difficulty to date in meeting
unemployment payments, nor any protests about the impact of
Qunemployment payments, nor any protests about the impact of
the economic crisis on social benefits. In addition, much of
the two stimulus spending was in the form of cash assistance
directly to Australian families.


M. What are the potential political ramifications for the
host country? How might the crisis directly impact
leadership? Is a change of government a possibility? What
are the social and security ramifications of the crisis?


35. (SBU) The Rudd Government has fared well despite
deteriorating economic conditions, and is in no real
political danger at the moment. PM Rudd continues to outpace
his opposite number, Liberal Party leader Malcolm Turnbull,
by a 2-1 margin in "preferred PM" polls, and Rudd's
Australian Labor Party (ALP) enjoys a comfortable lead in
national public opinion polls. Specifically, Australian
voters give Rudd's government high marks so far for its
handling of the economic crisis. Under Australian law, Rudd
will have to hold an election by early 2011. Most see 2010
as more likely, although there has been speculation recently
that Rudd could call an early election for later in 2009.


36. (SBU) The state of Queensland will vote on March 21 as
Premier Anna Bligh (ALP) tries to win a full term now rather
than waiting till later when economic conditions may be
worse. Although economic issues are important, there are
other Queensland-specific issues at play so this vote cannot
necessarily be taken as a national indicator.


N. Has the host government criticized and/or become
significantly more critical of the United States for its role
in the crisis or for provisions in the U.S. economic stimulus
package (such as the "Buy American" provision)?


37. (SBU) There were some grumbles by GOA officials about
"observing WTO and FTA commitments" in the press when the
"Buy America" provision first appeared; the media's
commentary was highly critical. Many Australian political
figures, including PM Kevin Rudd, have criticized the role of
the financial regulatory regime in the US for allowing
conditions which caused the current crisis. Such public
criticism has been relatively mild; far more criticism has
been leveled at Wall Street itself and the culture of greed
and careless risk-taking.


O. How might the crisis affect host government foreign or
security policy and U.S. interests?


38. (SBU) Australia remains politically stable. We do not
anticipate any developments here that would significantly
change its foreign or security policy, or hurt US interests.
Australia is the largest consumer of US military equipment in
Asia, however, and we expect some planned procurement of big
ticket items to be scaled back or deferred when the GOA's
Defence White Paper is released in April, despite the Rudd
government's commitment to 3% annual increase in real defense
spending through 2018.


P. How might the crisis impact the host government's ability
and commitment to sustain foreign assistance levels?


39. (SBU) The crisis has not led to any decrease in
Australia's foreign assistance levels. On the contrary,
QAustralia's foreign assistance levels. On the contrary,
Australia has provided an additional A$1 billion loan to
Indonesia to assist that country through the global economic
crisis. However, the GOA will likely be looking at ways to
reduce its budget deficit; it is possible though we believe
it unlikely that foreign assistance could be cut. In any
case, the effective scope of Australia's foreign assistance
has declined significantly along with the value of the
Australian dollar since July 2008.


Q. How might the crisis impact government support for global
peacekeeping operations and commitments to NATO operations,
e.g., in Afghanistan?


40. (SBU) The GOA takes its role in Afghanistan and elsewhere
(East Timor, Solomon Islands, for example) very seriously.
Prime Minister Rudd has repeatedly stated that Australia is
in Afghanistan for the "long haul" and that this is a war
that the allies "cannot and must not lose." Barring an
extraordinarily serious and prolonged economic downturn of
Great Depression levels, we don't see Australia significantly
reducing its commitments for budgetary reasons.

CLUNE