Tuesday, March 20, 2012

Reserve Bank cites sudden worsening in Eurozone crisis as biggest risk confronting Australia and the world

By Business editor Peter Ryan

The Reserve Bank has warned that any new escalation of the Eurozone debt crisis remains the biggest risk to the Australian economy.

In the minutes from its March 6 meeting, the RBA board has provided a reality check on the still fragile state of the global economy and Australia's exposure to Europe.

"The clearest downside risk to the outlook for Australia remained a sudden worsening in the situation in Europe and its flow-on effects to the rest of the world through trade, financial and confidence channels," the boardroom minutes warn.

"Members noted that a sharp slowdown, particularly in east Asia, would have significant implications for commodity prices and demand for Australian exports.

The minutes warn that a resulting "flight from risk" in global markets would see significant changes in credit conditions, the exchange rate and confidence.

While the RBA believes a worst case scenario from Europe is now less likely, it warns "this downside risk could still materialise."

The board minutes show that although the RBA believes the current cash rate setting is appropriate for now, it still has "ample scope" to ease policy as long as inflation remained contained.

The RBA board left interest rates on hold at 4.25 percent this month citing improved conditions in Europe and local comfort about inflation. The RBA cut rates by a total of 0.25 percent in both November and December last year as fears about Europe intensified.

The RBA board also underscored the strength of Australian banks which have been under pressure from higher funding costs on global markets.

"Members noted that the Australian banking system remained in a relatively strong condition," according to the minutes.

"The larger banks were in a better position than a few years ago to cope with the tighter funding conditions given the improvements made to their funding.

"The wholesale funding task had also become more manageable, with deposit growth continuing to outpace credit growth by a wide margin."

The minute also note the impact of the high Australian dollar and the creation of a multi speed economy.

But the RBA believes the booming mining sector is compensating for losses in struggling manufacturing industries which rely on a lower currency.

"Most information thus far has indicated that weakness in parts of the economy - including manufacturing, building construction and parts of the retail sector - was being approximately balanced by the strength in the mining sector and some services industries."

The Reserve Bank also noted that while global sharemarkets had grown ten percent since the beginning of the year, the Australian market was relatively weaker because of a larger weighting on the mining sector.

Monday, March 19, 2012

Corporate watchdog in crackdown on disclosure rule breaches as Leighton is fined $300,000

The corporate watchdog has put Australian companies on notice about their obligations to quickly disclose both good and bad news to the stock exchange.

The warning comes after the construction company Leighton Holdings was fined $300,000 for failing to promptly update investors about costly delays on Brisbane's Airport Link toll road, Victoria's desalination plant and the company's Middle East operations, Al Habtoor Leighton Group.

The delays caused a $900 million profit downgrade but the market was only given the bad news in April last year, three weeks after Leighton became aware of the losses.

The shock downgrade and an associated $757 million capital raising sent Leighton shares into a 12 percent free fall after a trading halt was lifted.

While making no admission of guilt, Leighton agreed to fines of $100,000 for each of the three disclosure breaches and will engage a consultant to overhaul the company's disclosure policies.

The chairman of the Australian Securities & Investments Commission Greg Medcraft told the AM program that the Leighton fines should remind all list companies about their obligations to keep investors fully informed.

Listen to my interview with Greg Medcraft here.

"What we have is an outcome that sends a very clear message to the directors of listed companies that they need to have a close look at what happened at Leightons and make sure that their own governance policies around continuous disclosure are adequate," Mr Medcraft said.

"A company has to immediately notify the exchange of any information that a reasonable person would expect to have a material effect on its price or value of it's securities. It's actually very clear."

Signalling a push for tougher penalties on disclosure breaches, Mr Medcraft said companies were required to disclose bad news material to a share price in the same way favourable developments would be reported.

"You can't just disclose the upside. You must also disclose the downside," Mr Medcraft told AM.

"We have the systems, we have the people and we have the power and where we identify unexplained price movements then the ASX or ourselves will satisfy ourselves as to those unexplained price movements."

Read the background to ASIC's action against Leighton Holdings here.

Leighton chairman Stephen Johns confirmed that as part of accepting the infringement notices the company would implement a formal review of its continuous disclosure policies and procedures.

Read Leighton's response, released to the ASX on Friday evening, here.

"We take our continuous disclosure obligations very seriously and have undertaken to ASIC to implement an independent review of our systems," he said in a statement.

"We recognise that continuous disclosure is extremely important for the efficient operation of the market and will use the review as part of our program to improve the systems that support our business."

Leighton has explained the delay in disclosure by saying it didn't have enough certainty on the scale of the downgrade until a review of its operations was formally concluded with a board meeting on the morning of April 11.

The delay prompted a class action against the company by shareholders who invested between November 2010 and April 2011.