Friday, August 17, 2012

Australia's Banks Are Now Worth More Than Europe's -— How Is That Possible?

Some additional background not mentioned below here

We finally know the real winner of the euro crisis. It's Australia.

Would you believe it if I told you that Australia's financial sector is worth more than the eurozone's financial sector? Well, it doesn't matter if you believe it or not. It's true. The technical term for this is "jaw-dropping." The chart below, from Cullen Roche of Pragmatic Capitalism, puts it all in rather stunning picture perspective.  It turns out that depressions aren't so good for banks.

A big chunk of this shouldn't surprise us. European banks loaded up on subprime debt. Australian banks didn't. European banks made their own bad real estate loans. Australian banks didn't. And European banks are sitting on top of piles of dodgy sovereign debt. Australian banks aren't.

But this doesn't really make sense. It explains why Europe's financial sector fell much more in 2008 than Australia's financial sector did, but it doesn't explain why Europe's has kept falling and Australia's hasn't. The answer, as always, is that it's about the economy. Commodity exports -- thanks, China! -- have powered Australia, while the eurozone has self-immolated in a crisis of the common currency. What does that have to do with banks? Well, financial contracts assume that incomes will steadily go up. When incomes -- and the economy -- do not grow as expected, debts that should not have gone bad go bad.

Something incredibly bad and incredibly rare has happened to Europe's periphery since 2008. The total size of their economies have fallen. So-called nominal GDP, which is just inflation plus real growth, usually increases 5 percent a year -- and that's what banks count on when they make loans. If the economy grows less than that, otherwise creditworthy borrowers will have a harder and harder time paying back their debts. Including governments.

The chart below looks at nominal GDP "growth" (or lack thereof) in Australia and Europe's periphery since 2008. As Evan Soltas said, Europe's problems are nominal.

Australia's nominal GDP has grown at a healthy rate. Europe's has not.  That simple fact explains why Australia's banks have rebounded from the financial crisis and Europe's banks have not. Until or unless Europe gets its nominal GDP back to something close to trend, its financial sector will keep falling behind Australia's (and everybody else's).
In other words, Europe's banking crisis will only end when Europe's economic crisis does -- which in turn is being held back by its banking crisis. It's a never-ending cycle of awful that only the European Central Bank can break. Maybe they will.


Industry taskforce points finger at carbon tax

A TASKFORCE comprising trade unions and manufacturers has cited the carbon price as adding to the pressures on the struggling industry sector in a report to government containing more than 40 recommendations, sources say.

The report by the manufacturing taskforce, a tripartite body established last year by the Prime Minister, Julia Gillard, is believed to recommend a raft of measures ranging from creating a sovereign wealth fund, buying more Australian-made cars and giving tax breaks, to bolstering the export potential of the local food industry.

Ms Gillard established the taskforce to explore ways to help the manufacturing sector, which has been suffering from the pressures of the high dollar, high labour costs and other pressures of the mining boom.

Sources familiar with the report say despite the involvement of the Labor-aligned trade union movement - the Australian Council of Trade Unions (ACTU), the Australian Workers Union and the Australian Manufacturing Workers Unions - the report cites rising energy costs caused by the carbon price as having an additional impact in an already competitive environment.

The body of the report calls for the effect of the fixed $23-a-tonne carbon price to be "ameliorated in the current competitive environment" for energy-intensive businesses and that the industry assistance provided for trade-exposed emitters be monitored and refined if necessary.

One recommendation says "energy prices directly impact on the competitiveness of Australian manufacturers and can be attenuated".

It suggests linking the carbon price scheme to international schemes, something already done, rationalising state and federal green schemes, a process also in train, and reforming energy markets, which Ms Gillard called for last week, and assisting business with implementing energy efficient measures.

The taskforce comprises Ms Gillard, senior ministers, the heads of the ACTU and the other unions, the Australian Industry Group and the chief executives of the companies OneSteel, Boeing, Holden and Kraft.

Today's report has been put forward by the unions, companies and the Ai Group, not the government, which will respond to it over time.

Sources familiar with its contents say the recommendations reflect the individual agendas of the participants as well as broader measures designed to help manufacturing as a whole.

One recommendation is the creation of a sovereign wealth fund which the AWU has argued previously would help take pressure off the dollar and create a savings pool for times of need.

It is also understood there is a recommendation for a full and independent inquiry into why small- and medium-sized businesses are struggling to secure capital, a problem that arose during the global financial crisis when access to credit dried up.

Other recommendations include skewing government purchases on cars further towards Australian-made vehicles, increasing the proportion of Australian goods and services that the Defence Department procures every year with its multibillion-dollar budget, and increasing the level of Australian content used in government spending on residential and commercial construction.

It also recommends an annual dialogue between the unions, government and business.

Chief executives of global companies have met and blamed the carbon tax for creating investment uncertainty.


Stupid woman

Being much in the public eye, she might unfortunately lead other women into similar foolish optimism

IF being fit and healthy were the only conditions needed for a healthy pregnancy then Sonia Kruger would come out on top.

The energetic 47-year-old, who features on the front cover of Woman’s Day this week, told the magazine she is still very open to the idea of having kids.

But being in peak physical condition does not affect your biological ability to fall pregnant, especially when you’re a woman over 40.

That’s the advice of obstetrician and gynaecologist Andrew Zuschmann, who is also a spokesperson for the Australian Medical Association.

“From about 45 onwards a woman’s chances of falling pregnant spontaneously are almost impossible,” Dr Zuschmann said. “Most need IVF or donor eggs to fall pregnant.”


Australia risks no growth without productivity boost

And with unions in the box-seat under Gillard, the prospects for productivity growth are slim

One of the world's leading management consultancies says Australia risks a future of no economic growth unless it dramatically improves its productivity performance.

A report by McKinsey Global Institute offers four scenarios for Australia's national income growth to 2017 - in the worst case, where productivity continues falling at the same rate as it has been in recent years and commodity prices keep declining to long-run averages, national income would rise just 0.5 per cent a year.

Even in the best case scenario, where productivity growth returns to long-run averages and commodity prices remain roughly where they are, Australia's income growth is likely to be 3.7 per cent - slower than it was in the pre-financial crisis years.
Audio: McKinsey's Chris Bradley warns of a low growth future (ABC News)

The report estimates a $135 billion gap in national income by 2017 between that best case scenario and the worst case outcome.

"If we don't fix productivity and the terms of trade settles back to its long run level, we could have almost no income growth in the next seven years," said Sydney-based McKinsey principal and report co-author Chris Bradley.

"In the best case where we sustain strong terms of trade and we do well on productivity, even in that case we'll probably have slower income growth than we've had historically."

He says Australia's income growth in the period between 2005-2011 was more about good luck than good management.

"Australia's added about $250 billion of income in the last seven years. About 90 per cent of that is explained by terms of trade, which is a better price for exports versus imports, and by investment, increased investment," Mr Bradley explained.

"When you strip back what's normal and what's not, our estimate is about half of Australia's growth in that era is kind of temporary. So if it weren't for the boom, we would have experienced more like 2 per cent income growth instead of 4."

The McKinsey report singles out productivity as the problem, with a 0.7 per cent annual decline between 2005 and 2011, compared to a 2.4 per cent increase between 1993-1999.

For those who are not sure what productivity measures, Mr Bradley gives a succinct definition.  "Productivity is simply a measure of how well we take our inputs and transform them into outputs," he explained.

"So labour productivity is very simply how much we get per hour of work and capital productivity is very simply how much we get per unit of fixed capital investment. So it is about more for less."

In that effort to get more from less, labour productivity has improved 0.3 per cent year since 2005 and added $17 billion to income - but this is far lower than its growth in the 1990s which added an estimated $57 billion.

However, capital productivity - that is the return businesses are generating from new buildings, plant, machinery and equipment - has been dismal, wiping an estimated $43 billion from national income.

Some of this - Mr Bradley estimates around two-thirds - is related to upfront spending on big mining projects that has not yet yielded a return, but soon will.

However, he says that leaves plenty of scope for businesses to be more efficient about where they spend their money, particularly on the big resource developments.

"The difference we've seen of doing a very, very good job on project design and execution can be 20 to 30 per cent," he said.

"But there's background factors too. You need enough people with the right skills and the enabling infrastructure to be able to deliver these projects.

"And then there's also probably a role for things like planning laws and just making it easier and faster to do projects in the best way."


Ombudsman slams Victorian University over soft marking allegations

VICTORIA'S Ombudsman has slammed Swinburne University in his annual report.

According to Ombudsman George Brouwer, a whistleblower reported that “a supervisor had directed a teacher to pass all of their students to ensure the university received upcoming federal government funding".

Mr Brouwer referred the allegation to the university for independent investigation, which found the claim was baseless.

However the Ombudsman criticises the process on seven counts, including a refusal by the investigator to address the federal funding issue and because; “the conclusions did not contain any analysis of the facts and findings of the investigation; specifically, there was no discussion of evidence that appeared to support the allegation”.

Although the university revised the report when challenged by the Ombudsman’s staff, “even the revision was inadequate, addressing only four of the concerns I had raised".

"I determined to finalise the matter in any case, as I considered that the outstanding issues were unlikely to significantly affect the outcome of the investigation, especially at such a late stage,” Mr Brouwer’s report states.


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