The Australian Governments Deposit Guarantee Scheme for Australian Banks - Case Study Example

351987 - The current liquidity crisis and Australian government's deposit guarantee scheme for Australian banks Introduction Australia is the major growth engine of world economy. She is proud of having one of the most dynamic and versatile economic systems in the free market world that is synonymous with efficiency, growth and capitalistic supremacy. The Australian dream of prosperity emanated from the commitment to the tenets of liberty and toil. Today, the Australia spearheads the global economic growth and is a true mirror of the progress achieved by mankind in all its endeavours. Today that Australia is also steering the global economy .The current crisis in the Australian Financial Services sector is being caused by banks in the last financial year, and the government deposits in the banks to overcome the current crisis. The stronger side of Australian economy lead global market The Australian economy has faced many tantrums during the decade of the nineties of the past century. As the economy of a prosperous nation cannot grow in isolation, the impact of 'crash' in the major Asian economies affected the Australian economy as well; the retardation of these economies affected the Australian economy in a harsh manner. This had happened in 1997 when the economies of Japan, Malaysia, Singapore and Thailand had nose-dived and the Australia exporters were left, cringing with tear about the shape of worst things to come. However, that dark period was now over and American economy is on its way to a healthy recovery. (Mike Williams ed.) Before we discuss the major statistics of the current problems, let us analyse how the Australian economy caused a factor for the plunge. There are some components of the Australian economy, which are as follows:— (A) Exports generated by MNCs. (B) Revenues generated by the large corporate players who operate in Australia only. (C) Small and medium entrepreneurs who are involved in the manufacture and marketing of products and services in Australia alone. The government takes adequate care of the unemployed persons (citizens). They are paid enough of allowances and financial security, which would enable them to lead their idle lives with dignity. Further, the entire operations of industries, banking, commerce, international trade, medicine, and education and business firms are fully computerised. Every citizen has a Social Security Number that enables him to enjoy his or her rights and privileges. As the problem of unemployment has assumed alarming proportions, the qualified young professionals prefer to start their own firms. Hence, in the Australia, there is a very large number of very small-sized firms. (Mike Williams ed.) In 2008, the budget has a spending plan of $ 1.84 trillion and has very poor chances of its approval, which is led by opposition at present. It would yield a surplus of $ 184 billion in the fiscal year, which would commence soon. The budget has proposed a surplus of $ 2.519 trillion over the next decade. So, the Administration would be able to pay off debt of $ 3 trillion by 2013. Budget surplus in the current fiscal year is $ 167 billion. The budget has special allocation of $ 20 million for South Asia. Out of this amount, an amount of $ 5 million has been earmarked for third world countries for welfare activities, economic reforms and liberalisation programmes. The Australian economy is service oriented. That would mean that the services sector plays a vital role in the growth of Australian firms. Further, the Australia is proud of having many multinationals. These firms generate enough of revenues on a global basis. Despite her commitment to service-related industries, however, the Australia has unemployed people as well; the unemployment rate in that country is 4.2 per cent. The trade imbalance is not in favour of Australia. The nation is importing more than she is exporting. In 2005, imports increased by 1 per cent, to a value of $ 104.2 billion. The rise in exports was to the tune of $679 billion. In July, whereas the exports during June, were to the tune of $ 0.4 billion is too small for a large economy like that of Australia. Trade deficit with China in July, was $ 6.31 billion and trade deficit with Japan was $ 6.78 billion in July,. In The trade agreements of the Australia with Mexico, Canada, and other partners of Asia have led to higher revenues for those partners; the Australian economy could not reap the benefits of these agreements as it laid emphasis on imports. If trade deficit increases, it would undercut the value of Dollar as money would keep on flowing out of the USA in order to meet the obligations of import bills. The Dollar would become weaker and therefore, imports would be costly as it would be difficult for the importers to buy more from the foreign markets. This step could possibly lead to inflation. The bank rate of interest may be stepped up. This would lead to the dampening of the present economic boom. And if this happens, the global economy would be affected. As on date, the Australian economy is growing and ought to slow down. This would be necessary in order to rectify the imbalance in trade. But the brighter side of the Australian economy is also having some dark spots. The slump in the Asian markets was nearly over. The recovery of the economies of Japan, Malaysia, Singapore and Thailand is quite visible. The large capital outflows caused by the crisis did not allow these nations to pay for imports and their economic growth rates were slashed. These nations reduced their imports but continued to export. Hence, there were trade surpluses in the Asian nations. The foreign exchange reserves increased. This situation could be repeated at a later stage as well. There could be an end in the boom of the Australian economy. This could lead to a fall in consumer expenditures. The Australian economy would drag the economies of Europe and Japan, both these nations being heavily dependent upon the USA for their exports. Further, the developing nations would also have an impact of the totally transparent and open Australian economic mechanisms. These nations do not export much and they do not have the financial leverages to get loans from the international markets. Therefore, the developing nations may be plagued with another financial crisis, the one that was witnessed by the major economies of the Asian subcontinent. The Australian stock markets account for more than half the value of the equity markets of the world. If the Australian economy were to lose its tempo and faces a serious slump in its domestic front, the tremor would be felt directly in Japan, Thailand, Singapore and China and indirectly in the developing nations. Australian economy is the major economic and industrial growth engine of the entire world. Experts feel that it could run out of steam. If the Australian economy is forced to commit suicide, many Asian economies would be forced to commit a sacrifice. However, Australian economy, was on date, is resilient enough to meet the challenges it now faces. But the system had gone completely ill affected. The current problems are due to the collapse in the banking sector. The current crisis in the world Financial Services sector is being caused by banks in the last financial year, and the government deposits in the banks to overcome the current crisis.( Barro, Robert ) How does it happen? Let’s see it in detail. The current crisis in the world Financial Services sector is being caused by banks in the last financial year, and the government deposits in the banks to overcome the current crisis. Since the economy was that much stronger position in the past, it was the projected figure in the last year was so swollen and the reported inflated profits made to management to issue inflated bonus to the top level. It was an act without strategic analysis. But after the inflated figures were over, when the inflated figures touch the ground level, banking institutions were struggled to survive. All most all banks faced the situation. However those with adequate reserve fund could manage the situation to survive. Along with these, the following factors too contributed much for the problems. Here, we will discuss the impact of globalization on production and marketing and ultimately consumer price inflation in the global market, it can be stated that there is the sole evidence of the factors accelerated and affect in last two decades. 1. Import prices As stated above, globalization sector imports have been growing strongly, but euro area imports from low-cost countries such as India, China and the new EU Member States (henceforth NMS) have been growing even more rapidly. But there are countries suffering with the aggression of the MNCs. Rising imports from low-cost countries are putting downward pressure on extra-euro area manufacturing import prices. Overall, it is estimated that the increase in import penetration from low-cost countries over this period may have dampened euro area import price inflation by an average of 2.1 percentage points each year. 2. Wages Turning briefly to recent euro area wage developments, globalisation may have been one contributing factor to an extended period of wage moderation within the euro area (for instance, through offshoring or the threat of offshoring), across both manufacturing and service sector. While productivity growth in the euro area has also been moderate over the last decade, real wage growth has also been low. Over the years, both productivity (output per person) and real wage growth rates averaged around 1.9%. Over the period 2006, average productivity growth was approximately 1%, with average real wage growth around 0.4%. But, in the euro area it appears that wage moderation since the setting up of the euro has been a very powerful response to the level of mass unemployment that characterized Europe in the 90’s. The wage moderation has been at the root of the remarkable employment success of the euro area with 15 million new net jobs created in nine years, 2 million more than in the U.S. during the same period. 3. Overall impact on producer and consumer prices The recent trends experience thus indicates that relative price impacts have been strong over the last decade, with disinflation in manufactured goods contrasting with a strong acceleration in prices for commodities, though a complete assessment of their importance relative to historical norms is hampered by limited past data. The producer price inflation has shown strong relative price effects, with muted development in consumer goods . 4. Economic Growth Globalization is a universal concept meant for the benefit of all member countries and to raise standard of welfare of the people. This means that it should raise the rate of economic growth in poor third world countries and reduce world poverty. It should not increase inequalities or undermine socio-economic security within countries. The sole concept of unity for poverty alleviation has a significant accelerative point in the growth of globalization. It is widely accepted factor that the clear cut test for globalization is whether it is significantly speeds up development and the reduction of absolute poverty in the world, and whether it ensures economic, social and environmental sustainability. Remedial Measures The current crisis in the Australian Financial Services sector is being caused by banks in the last financial year, and the government deposits funds in the banks to overcome the current crisis. The top four lenders of Australia are: 1. National Australia Bank, 2. Australia and New Zealand Banking Group, 3. Commonwealth Bank and 4. Westpac Banking Corp Australia's all these four major lenders, had portrayed themselves as having strong bank systems, particularly Australia whose government and all other regulators offered repeated assurances it was well placed to overcome the crisis.. Australian Prime Minister Kevin Rudd declared in a news conference to say his government would guarantee Australia's entire deposit base of A$600-A$700 billion ($386-$450 billion) for three years and guarantee wholesale bank funding. "We are in the economic equivalent of a national security crisis, and the challenges are great," Rudd said. He referred that Australian banks could be disadvantaged if his government failed to act and also added that the recent moves by other economies, such as Britain, Germany and Ireland, to extend guarantees or state aid to their banking systems. The government was in close contact with other nations, including the G-20, and coordinated action was crucial, Rudd said. Adding that the measures were part of an international response to the crisis, Rudd said, Australia would also make an extra A$4 billion available for mortgage-backed securities market to help maintain liquidity for non-bank lenders. Reference 1. http://www.theaustralian.news.com.au/business/story/0,28124,24477771-5013565,00.html 2. http://www.macquarie.com.au/au/about_macquarie/acrobat/DIP_supplement_dec08.pdf 3. http://www.freehills.com.au/4408.aspx 4. Organization for Economic Co-operation and Development Fund Management and Government Securities Markets in the 21st Century. 5. Mike Williams ed. Government Debt Management: New Trends and Challenges, Central Banking Publications. 6. Barro, Robert "On the Determination of the Public Debt", Journal of Political Economy, Vol 87, pages 940-71. 7. Barro, Robert "Notes on Optimal Fund Management", Harvard University, May. 8. Dornbusch, Rudi 'A Primer on Emerging Market Crises', MIT, January. 9. Leong, Donna " Fund Management: Theory and Practice", HM Treasury Occasional Paper. 10. Lucas, Robert and Nancy Stokey "Optimal Fiscal and Monetary Policy in an Economy without Capital", Journal of Monetary Economics 12, pp. 55-93. 11. Missale, Alessandro "Managing the Public Fund: The Optimal Taxation Approach", Journal of Economic Surveys Vol 121 No.3. Read More