Australia: Shares crash amid warnings of prolonged recession

Tens of billions of dollars were lost on the Australian share market on Monday and Tuesday, both before and after the congressional defeat of the US Wall Street bailout plan. While the political failure in Washington staggered commentators and investors, the market rout also reflected deeper fears that even if the bailout were rubber-stamped, its measures would not prevent a further financial meltdown.

Banking and mining stocks led the fall on Tuesday, as nearly $A60 billion was wiped off share values, after Wall Street suffered its biggest one-day point slide. The benchmark S&P/ASX 200 Index closed down 206.9 points, or 4.3 percent, to 4,600.5, while the broader All Ordinaries dropped 207.9 points to 4,631.3. A flood of selling in the final half-hour of the session pulled the market down to its lowest point in nearly three years, about a third below its peak last November.

Some investors were still hopeful that the US bailout would ultimately pass with modifications, but they warned any rescue would only help the market in the short term. Tom Elliott, a fund manager with MM&E Capital, said: “People are now focusing on the realities of a recession and more bank failures.”

Global miner BHP Billiton shed 9.5 percent, taking its two-day losses to nearly 20 percent, and its takeover target Rio Tinto plummeted 12 percent, taking its fall this year to more than 30 percent. Another prominent iron ore company, Fortescue Metals slumped 17 percent.

Australia’s big four banks, which between them hold 85 percent of the local banking market, were also hit. Westpac lost 7.2 percent, Commonwealth Bank dropped 2.9 percent, NAB shed 5.6 percent, and ANZ 0.2 percent. Merchant bank Macquarie Group fell 0.5 percent, while its rival Babcock & Brown plunged 17 percent.

Bewilderment was expressed in media interviews with small investors. The Sydney Morning Herald reported: “Investor Craig Hill could only look on in disbelief at the trading board of the Australian Stock Exchange as he watched his shares plummet this morning. Mr Hill was one of about two dozen mum and dad investors who had come to the stock exchange to see the flow-on effect from the bloodbath that had unfolded in the US markets overnight… ‘I’ve come to watch my shares evaporate,’ he said.”

Months of reassurances from the Rudd government, financial regulators, the Reserve Bank of Australia (RBA) and money market “experts,” claiming that the Australian economy was sheltered from the international turmoil, have proven false. 

The shift in sentiment was reflected on the business web site, BusinessSpectator, where veteran financial journalist Robert Gottliebsen warned on Tuesday: “This stock market shock will lead to a severe US recession. In Australia our own downturn will be steep and the Reserve Bank will have to step in to keep Australian banks afloat.” He added: “What the stock market is telling us is not to expect a return to a strong economy for at least two years.”

In fact, the RBA has been working feverishly for weeks to keep the local banking system afloat, pumping in billions of dollars almost daily. In concert with other central banks around the world, the RBA has also intervened repeatedly in failed bids to restore global liquidity. On Monday, the RBA announced a $US20 billion swap line with the US Federal Reserve, just five days after announcing a $10 billion swap.

In a bid to prevent panic, Prime Minister Kevin Rudd and Treasurer Wayne Swan called a joint press conference in Canberra on Tuesday morning and made a series of television and radio appearances, starting with the breakfast programs. Rudd and Swan again claimed that the Australian banking system was “weathering the financial crisis well” and was “fundamentally different” from that in the US.

These assurances were belied by a front-page report in the Australian Financial Review that the banking regulator, the Australian Prudential Regulation Authority (APRA) had warned the big four banks against treating loans to debt-laden companies such as Macquarie Group, Babcock & Brown and Challenger Financial and their various listed funds as separate exposures, thus under-reporting their bad debts. Officially, the banks are not allowed to lend more than 25 percent of their loan book to a single entity without APRA’s permission.

Far from being “fundamentally different” from their US counterparts, since the mid-1990s the Australian banks have become dependent on money markets in America and elsewhere for nearly 80 percent of their funding sources. They need to borrow an estimated $A120 billion overseas this year, but the sources have largely dried up and the interest rates have become prohibitive.

This week’s growing list of giant banking collapses in the US and Europe—Washington Mutual, Wachovia, Fortis, Dexia, Bradford & Bingley, Hypo, Glitnir—has underscored how the banks worldwide have become intertwined, and exposed to increasingly worthless financial products.

Writing in the Australian, Adele Ferguson observed: “The collapse in global credit markets and the exposure to the shady world of CDOs and other derivatives goes a long way to explaining why the banks have taken a pounding in the past year, with more than a third wiped from the sector’s market capitalisation. Investors are increasingly worried that much of the banking activity occurs in the murky underworld that is not reported in their official balance sheets.”

Claims that Australia would be shielded by booming mineral and energy exports to Asia, especially China, accompanied by sky-high commodity prices, were further dented by reports of a marked slowdown and falling base metals prices in China. Xu Lejiang, the chairman of China’s leading steel company, Baosteel, said this week that the Chinese economy and steel industry were both “heading for a downward slide”.

Credit rationing by the Beijing government, in an effort to contain inflation, has combined with the global financial crisis to halt many construction projects, cutting steel demand. The research house Mysteel said the Chinese steel industry was already in recession, with prices for steel products falling 15 to 20 percent since July.

“Era of austerity ahead”

Within the Australian political establishment, as in the US, there is a bipartisan consensus behind the Wall Street rescue package and its underlying assumption that the working people, not the bankers and financiers, who must bear the burden of the financial catastrophe.

At his media conference with Swan, Prime Minister Rudd described the congressional rejection of the US bailout as a “bad development”. Rudd insisted that the package had to be re-presented and the vote reversed. “This is necessary for the stabilisation of the US financial markets, it’s necessary for the stabilisation of global financial markets,” he declared.

The Labor government last week produced its own bailout scheme for smaller banks and lending institutions, whose overseas funding sources have almost completely frozen up. While spending is being slashed on social programs, $4 billion will be used to buy mortgage-backed securities issued by these finance houses.

The recently elected Liberal-National Party opposition leader, Malcolm Turnbull, issued another offer, following one made last week, of bipartisan support for the government’s efforts to boost the markets. “We will deal with these challenges as Australians,” he said. According to today’s Sydney Morning Herald, Turnbull has privately pledged not to criticise the government on economic policy during the crisis.

In the US, both Democrat and Republican leaders are intent on imposing a $700 billion rescue plan to shore up Wall Street at the expense of the vast majority of the population. Likewise in Australia, the consensus in the political and media establishment is that the living standards of ordinary working people must be slashed to shore up the interests of the financial elite. In a column entitled “Era of austerity ahead”, the Australian’s economics editor Michael Stutchbury declared that the “local political debate” had yet to face up to the implication that the global credit crisis would require “a more painful adjustment for the Australian economy”.

Stutchbury stated that any “sharper correction” would have to fall “hardest on areas such as housing and housing consumption”. This is under conditions where, as Stutchbury noted, household net assets have already dropped by 16 percent over the past year. This aggregate fall, which primarily reflects slumping house prices, as well as heavy losses by superannuation and other retirement funds, has been born mainly by working people.

A half-yearly Financial Stability Review issued by the RBA last week showed that house prices have fallen most in western Sydney, the largest working class area in the country, while housing loans arrears have risen to 1.2 percent in western Sydney, more than double that for the rest of Sydney.

At the same time, millions of workers and retirees have suffered losses of more than 10 percent in their superannuation and retirement funds, shattering their hopes of a decent retirement.

To justify “painful” economic measures, Stutchbury and other economic commentators have blamed working families for the meltdown, accusing them of taking out mortgages they could not afford. The reality is that working class people have had to go into historically unprecedented levels of debt over the past decade simply to cope with soaring housing and other living costs; while members of the corporate elite consciously exploited their plight to siphon off super profits and spectacular bonuses.