Friday, September 7, 2012

Super Mario to the Europe's rescue with plan for unlimited bond buying

By Business editor Peter Ryan

The president of the European Central Bank has started to deliver on his recent promise to do whatever it takes to save the euro.

Mario Draghi says the ECB has agreed to take on unlimited amounts of debt from struggling eurozone nations to prevent a much-feared break-up.

It is the most ambitious action yet to stem Europe's sovereign debt crisis.

Listen to my analysis from this morning's edition of AM.

Throughout this crisis the can certainly has been kicked down the road, but importantly today we are seeing unprecedented bond buying, which will give the eurozone more breathing space to get out of this crisis which has been running now for three years.

The ECB's action is intended to ensure that Spanish and Italian bond yields will no longer be able to rise to the post-euro highs we have seen over recent months that had threatened to make both nations' debt repayments unsustainable.

The key words in the ECB announcement are "unlimited bond buying", which could mean hundreds of billions of euros from the ECB.

However, there are conditions: countries like Spain and Italy must first request help from the Europe's bailout fund, and commit to economic reforms and austerity, before the ECB will actually step in to buy their bonds.

Under the program, called Outright Monetary Transactions, the ECB will step in to buy an unlimited quantity of bonds that financial markets do not like or want.

That could be enough to help these countries turn themselves around, but the ECB rescue may be very costly, maybe putting more than 1 trillion euros on the line in bond purchases.

There are risks that the ECB simply gets stuck with a lot more debt on its books for little long-term benefit, with Spain and Italy taking the chance to rack up more debt at lower interest rates.

However, when pressed on this point, the ECB president Mario Draghi made it clear that the central bank would pull the plug if indebted countries do not play by the rules.

"We want this to be perceived as a fully effective backstop that removes tail risks from the euro area. We want this," he told reporters at a press briefing after the meeting.

"But, at the same time, if we reach our objectives why should we continue doing so? If governments or countries do not comply, why should we continue doing so?"

The decision by the ECB was not unanimous.

There was one significant dissenting view from Germany, with its central bank governor voting against this bond buying measure.

That was anticipated, though, given Germany's recent protests that the ECB was breaching its mandate and possibly EU law, and also risking an outbreak of inflation.

The German industrialist and former head of IBM Europe Hans Olaf Henkel is one very vocal critic who says the ECB's strategy is flawed.

"The European Central Bank has totally gotten under the control of politicians. They will save the euro to the death," he said.

"As far as the conditions are concerned, with the exception of Ireland, all those countries have meanwhile dropped all commitments which they made. The politicians are making a mistake."

However, the move got almost unanimous support from investors, with European markets surging on the news.

Spain's main share index rocketed almost 5 per cent, even though under this strategy it would need to seek a fully blown bailout in the first instance from the EU to qualify for the bond buying program.

So, in some ways, investors are getting excited about something that could actually be quite bad news.

In the US, the Dow Jones Industrial Average closed almost 2 per cent higher, with both it and the broader S&P 500 jumping to their highest levels in more than four years.

You can follow Peter Ryan on Twitter @Peter_F_Ryan

Thursday, September 6, 2012

Unemployment falls despite job losses

By Business editor Peter Ryan

There's more unexpected good news on the economy, with the jobless rate falling to 5.1 per cent.

However, the lower unemployment rate in August comes despite the loss of 8,800 jobs.

The surprise result defied predictions of a rise in unemployment to 5.3 percent and follows yesterday's GDP figures which confirm 21 years of continuous economic growth in Australia.

Key results:

Unemployment       5.1 percent
Employment           -8,800
Participation rate     65.0 per cent


Wednesday, September 5, 2012

Gina Rinehart says Australia is too expensive; competing with $2 per day African workers

By Business editor Peter Ryan

Gina Rinehart has used a rare video appearance to repeat her warning that Australians need to work harder to compete with Africans who will labour for less than $2 a day.

In a reference to BHP Billiton's reasoning for shelving its Olympic Dam expansion plans, Mrs Rinehart says companies are "running a ruler" over their investments because of cost overruns and low productivity.

Here's my analysis from this morning's edition of AM.

Yesterday, Fortescue Metals Group announced it was deferring some expansion projects and cutting costs, although its reasoning for the move was focused on a slump in iron ore prices rather that cost overruns.

Speaking in video posted on the Sydney Mining Club's website to discuss the recently signed enterprise migration agreement which will allow her to import 1,700 foreign workers for her Roy Hill Iron Ore project, Mrs Rinehart says Australians should not be complacent about the investment pipeline, given that African labourers will work for less than $2 a day.

"Business as usual will not do, not when West African competitors can offer our biggest customers an average capital cost for a tonne of iron ore that's $100 under the price offered by an emerging producer in the Pilbara," she said.

"Furthermore, Africans want to work, and its workers are willing to work for less than $2 per day. Such statistics make me worry for this country's future."

The fresh comments drew immediate criticism from Prime Minister Julia Gillard.

"We are not going to have wage rates the same as the wage rates in Africa. We're not going to compete on those kinds of cost differentials," she told Linda Mottram on ABC 702 local radio in Sydney.

"We're going to compete on our great mineral deposits, our application of technology and high skills to the task. We mine differently than in other countries."

In the video, Mrs Rinehart raised the idea of a "special economic zone" in northern Australia that would have lower taxes and fewer regulations to encourage investment.

"We need to create a large special economic zone in our north, stretching across northern Queensland, northern Western Australia and the Northern Territory, with fewer regulations and taxes, a region that truly welcomes investment and people," she said.

Mrs Rinehart also renewed her attack on the Treasurer Wayne Swan for what she calls a campaign of class warfare.

"Our federal and state governments must know that now, more than ever, we must lift our international competitiveness just to stay as well-off as we are," she said.

"And with state and federal debts, we must get realistic not just promote class warfare. Indeed, if we competed at the Olympic Games as sluggishly as we compete economically there would be an outcry."

Ms Gillard dismissed Mrs Rinehart's criticism as one driven by self-interest.

"We have a different view from Ms Rinehart about whether or not the mineral bounty in our natural landscape should be shared with all Australians or kept for the profits of a few," she responded.