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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