Financial Crisis in Australia and Their Remedies - Essay Example

FINANCIAL CRISIS IN AUSTRALIA AND THEIR REMEDIES TABLE OF CONTENT PAGES ACKNOWLEDGEMENT 03 INTRODUCTION 03 CAPITAL MARKET 04 PRIMARY & SECONDARY MARKETS 04 MONEY MARKET 05 ALL ABOUT AUTRALIA 06 CURRENT FINANCIAL POSITION OF AUSTRALIA 07 BANK DEPOSIT GUARANTEE 09 ADVANTAGES 11 DISADVANTAGES 11 CONCLUSION 12 REFERENCES 13 ACKNOWLEDGEMENT We are very thankful to our instructor who have confidence on us and gave this opportunity to research on the financial market of Australia. The research helps us to have a hands on knowledge over the financial constrains and the measures Australian Government is about to take to extract out the economy from a deep recession. This paper gives you an idea about the capital and the money markets, how they are operating and how they are performing. It gives the readers an immense knowledge about the country and its financial systems and the current hazards from they are interacting. Study elaborates adequately about the recent action of Australian Government regarding giving the guarantee to the deposits, its advantages and some disadvantages. INTRODUCTION: Since the time of Adam Smith, market economies have evolved enormously. Advance capitalist economies, such as the United States, Western Europe and Japan have three distinguishing features: Trade and specialization, money and capital. An advance economy is characterized by an elaborate network of trade, among individuals and countries which depends on great specialization and an intricate division of labor. Money economies today make more extensive use of money, or the means of payment. Money provides the yardstick for measuring the economic value of things and for financing trade (Susan, 2008). Modern industrial technologies rest on the use of vast amount of capital: precision machinery, large-scale factories and stock of inventories. The medium by which the money can be circulated easily into markets; there are a number of markets but we are mainly concerned with the money and capital markets. Let’s see each one in detail. THE CAPITAL MARKET: Capital markets are the markets for intermediate or long term debt and corporate stocks. The New York stock Exchange (NYSE), where the stocks of the largest U.S Corporations are traded, is a prime example of a capital market. The capital market enables the suppliers of funds (the saving-surplus unit) and the users of funds (the saving-deficit unit) to negotiate the conditions on which the funds will be transferred (Hunt, 2008). Equity or share market involves an essentially permanent transfer of funds with returns to shareholders contingent on the future probability of the company raising the funds. A debt market usually involves a temporary transfer of funds with predetermined promised return to lenders. In finance, equity and debt markets together form the capital market (Krugman, 2000). There are two major markets that come under the umbrella of capital markets, which are primary and secondary markets. Let’s have a cursory glance over the said markets. PRIMARY & SECONDARY MARKETS: Markets for financial assets may be either primary markets where financial assets are first sold by their originators, or secondary markets where existing financial assets are traded. Primary markets are important because it is in these markets that a saving deficit unit occurs, for example a company, raises new funds to finance its investment. Thus a company may take a new share issue to finance its investment. On the contrary, a transaction in the secondary market do not raises any new funds for the company; all that happens is a change of ownership; the seller of the security transfers, for a price, ownership of the security to the buyer. However, secondary markets are important because they provide liquidity (Salisbury, 2008). This enables borrowers to raise long term debt even though individual suppliers of funds may be prepared to provide funds only for much shorter terms. In this way the existence of an active secondary market facilitates raising capital in the primary market. Without active secondary market, many investors would not participate in primary markets because they require the flexibility to redeploy their funds. MONEY MARKET: The markets for short term, highly liquid debt securities are referred to as the Money market. There is no hard and fast rule on this, but when describing debt markets “short term” generally means less than one year. The New York and London money markets have long been the world’s largest, but Tokyo is rising rapidly. Investors tend to think that the stock market is a risky place to invest when they see a bearish trend in the market or a bearish trend analyze. To earn a higher expected return, an investor has to take a higher level of risk on his investment. Many investors are not willing to leap in the volatile market, and then they find an alternative in the form of Money market which offers an alternative to these higher-risk investments. Large institutions and government manage their short term cash needs with the money market. However an individual investor can access the market through different securities (Disbury, 2001). ALL ABOUT AUSTRALIA: The word Australia derived from a Latin word Australis, which means “Southern”. Australia is located in the southern Hampshire and known as a smallest continent. Australia has neighboring countries like Indonesia, New Guinea, East Timor and New Zealand. The continent has six states and two mainland territories. The states of Australia include New South Wales, South Australia, Queensland, Tasmania, Western Australia and Victoria, while as far as two major territories are concerned, their names are Northern territory and the Australian Capital Territory (ACT). The country has a landmass of 7,617,930 square kilometer which is located on the indo-Australian plate. Arafura and Timor are the two seas which separates Australia from Asia. Australia has a strong technology and industries which makes it a prosperous multicultural country which has good results in national and international performance. The country has a wonderful record in health care issues, life expectancy, quality of life, public education, human development, education, economic freedom and civil liberties and rights (Rusden, 2005). Due to Australia’s economical and political stability it is counted as a member of the United Nation (UN), G-20 Major economies and Commonwealth of Nations. The currency of the Commonwealth of Australia is called the Australian Dollar. The country has two largest stock exchanges which play a vital role to keep the economy on the right track; names of these two largest stock exchanges are The Australian Securities Exchange (ASE) and The Sydney Future Exchange (SFE). According to the statistics of Economic freedom, Australia is one of the most strongest and capitalist economies of the world which has a per capita GDP slightly higher than that of Germany, United Kingdom and France. Australia mainly emphasizes on exporting commodities rather than manufacturing it which urges the balance of payment of the country to increase which is currently more than 7% of negative GDP which is ultimately enhancing the account deficit persistently from more than 50 years. The largest export markets of Australia are China, Japan, United States, New Zealand and South Korea. CURRENT FINANCIAL POSITION OF AUSTRALIA: Since the last 15 years Australia has grown at an average rate of 3.6%. As per the statistical data of 2007, there were 10,033,480 people employed, and in the said year the unemployment rate of the country was 4.6%. Inflation rates and interest rates were in control from the decades manifest a figure of 2-3% and 5-6% respectively (Davis, 2001). . The services sector including, tourism, education and financial services contributed 69% of the overall economy while the agriculture and natural resources contributes 3% and 5% respectively in GDP (Business Review Weekly, 2009). The economy of the country was on the right track and was moving with a satisfactory pace before the current credit crisis has taken hold of the entire world in its fatal claws. Australia is also severely affected from the financial crisis as the International Monetary fund (IMF) predicted one year before that the country’s economy would fall into recession in 2009 and the forecast was right. Australia’s central bank predicted the economy would barely grow this year, pushing unemployment higher and pulling inflation down in what could be a recipe for further cut in interest rates. United Kingdom and the United States have already cut down their interest rates to almost zero percent to attract the investors (Pataki, 2008). In the quarterly statement on monetary policy, the Reserve bank of Australia (RBA) sharply cuts its forecast for growth in this year, blaming a deepening global recession for darkening the outlook for exports and business investment. If we perceive an optimistic approach then we can say that hefty cuts in interest rates, mounting fiscal spending and a lower local dollar would combine to cushion Australia from the worst of the fallout. The RBA has certainly become aggressive now and decided to cut its key crash rate by four percent in five months which is taking it to a record low of 3.25%. Interbank are also showing a catastrophic graph and reaching 2.25 percent by June. The government has intervened with a stimulus package of $27 billion to be spent on the infrastructure and income support program. Australia’s economy plunges as badly as the government pumped A$10.4 billion last year and now injected A$42 billion this year but unable to halt the reserve bank of the country to cuts its forecast for gross domestic product (GDP) growth FY 2009 to just 0.5 percent , down from 1.75 percent in November. The thing which is worrying Australia’s government continuously is the consistent bullish graph of unemployment which is rapidly rising from February and reached four years high of 5.2 percent. According to the International Monetary Fund (IMF) unemployment is likely to rise significantly in the months ahead, from the current 5.2 percent level. The sharp falls in the economy means the outlook for jobs may be worse than expected, and Australia may not abrogate from the waves of layoffs that are occurring in the US and UK recently. The country’s economy is deteriorating continuously and the growth was expected to pick up to 2.5 percent in 2010 and return to trend around 3.5 percent in 2011, down from previous anticipation of 3.5 percent and 3 percent respectively. The central bank measures the inflation which seems to be slow to 3 percent at the end of 2009 and to 2.5 percent the year after, putting it back within the RBA’s target of two to three percent a year earlier than previously expected. As we are cognizant with the fact that Australia relies heavily on the exports and the prediction of IMF regarding the global growth envisage a bad news for the country because IMF expected the global growth to be the slowest since World War II. Business investment was also expected to fall through the next few years, Indeed the RBA estimated that output in Australia’s major trading partners would decline by around 0.75 percent in 2009. Consistent with the large fall in income, real gross national expenditure (GNE) is forecasted to contract modestly through 2009. Apart form the other majors to overcome on the financial crisis the Australian government intends to pledge the money of the depositors. Let’s now discuss this issue and its advantages and disadvantages in detail. BANK DEPOSIT GURANTEE: Financial institutions in every country are an essential ingredient to push up the economy and it’s the government job to merely support the institutions to affect immensely on the economy to rise. Australian federal government has done the same thing by giving guarantee to all the deposits in the bank for 3 years to enrich the performance of the financial sectors and also boost up the moral of the depositors. The Australian Prime Minister Kevin Rudd has announced that the government will guarantee all the deposits in the banks for 3 years. Kevin Rudd said that the Government is also stands behind all the money that the Australian banks borrow from the foreign institutions. Australian government also pumps another $4 billion in secondary market of mortgage. This action of Australian Government will definitely enhance the moral and confidence of the depositors of the bank because globally banks are one of the sectors which are severely hit by the credit crunch (Australian Financial Review, 2009). A bill will soon be bought in the parliament which will induce the banks to implement on the measures immediately and then the banks will pay an insurance premium to cover the protection. The information of guaranteeing the deposits brings good news for the banking sector and the S&P/ Australian stock exchange (ASX) surge by 220 points or 5.5 percent to close at 4180.7 in March. HSBC which is one of the largest banks welcomes the Australian government’s action to support the banking system as these are the necessary steps in restoring or recapturing the confidence of depositors and investors. According to HSBC bank, the brutal action will safeguard the Australians from the global financial crisis up to some extent and will help to save the deposits in the banks; all the deposits up to A$ 1 million with HSBC bank Australia Limited are guaranteed by the Government at no cost. Mr. Rudd has enough confidence on their financial sectors. Mr. Rudd says “Australia is the best country in the world to deal with this crisis and we are well aware how to tackle with this monster” He percept that we have the best bank regulators in the world and the balance sheet of our banks show the strength of the sector which will leap out from the current financial constrain with the help of current government strategy regarding the deposit guarantee. There are a number of advantages but there are some disadvantages of that action that come into play, let’s have a glance over them. ADVANTAGES: The action will boost up the moral of the investors and depositors to put their money in the bank. Foreign direct investments (FDI) will enhance. Action will help to increase the equity of the bank and also increase the lending power of the bank (Gyngell, 2007). Extremely beneficial for the Small & Medium Enterprises (SME) which mainly emphasize on debts. The confidence of the people again gets stable on the banking sector. Financial sectors will again come into action to stabilize the economy, which is badly hurt by the financial crisis. DISADVANTAGES: The central bank of the country has been unable to influence over the cost of borrowings. The banks had boosted the mortgage rates by 0.55 percent after the action. The heavy pricing of the government’s guarantee (for deposits) are not beneficial for the smaller banks like Adelaide Bank and The bank of Queensland. According to RBA the spread on AAA-rated residual mortgages have slashed from 1.3 percent to more than 4 percent. CONCLUSION: As we are all aware that the financial crisis is prevalent in the whole world and the current global crisis is as worse as the depression after the World War II. Likewise, the world is fighting to avert the financial crisis. Australia is also doing the same to strengthen their economy for which they are taking enormous decisions like cut down the interest rates, injecting money in the weaker sectors, introduce the stimulus packages for the economy, but the recent action of guaranteeing the banks deposit was the best one to stabilize the economy and regain the depositor’s confidence. REFERENCES Australian Financial Review (2009). Retrieved from http://www.afr.com/home/ Business Review Weekly (2009). Retrieved from http://www.brw.com.au/ Disbury, F (2001). Challenges and opportunities. Transaction publishers. Davis, Kevin (2001). Financial Reform in Australia. Dept. of Finance, the University of Melbourne. Gyngell, Allan & Wesley, Michael (2007). Making Australian Foreign Policy. 2nd Edition. Cambridge University Press. Hunt, B & Terry, C, (2008). Financial Institutions and Markets. 5th Edition. Thomson. Krugman, Paul (2000). The Return of Depression Economics. W.W. Norton & Co. Pataki, G, & Thomas, J (2008). Confronting Climate Change: A Strategy for U.S. Foreign Policy. Council on Foreign Relations. Richard, P, Miller, M (1999). The Asian Financial Crisis. Cambridge University Press. Salisbury, L & Shoguns (2008). The Twentieth Century. University of California. Susan, Howson & Winch, Donald (2008). The Economic Advisory Council, 1930-1939: A Study in Economic Advice during Depression and Recovery. Cambridge University Press. Rusden, William G. (2005). History of Australia. 2nd Edition. University of Michigan Read More