18/03/2010 - 00:00

Financial crisis still a long way from over

18/03/2010 - 00:00


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The collapse of some international currencies is the next stage in the ongoing GFC.

Financial crisis still a long way from over

IF you think a ‘race to the bottom’ is a leftover event from the Vancouver Winter Olympics then you’re wrong. A race to the bottom is what most of the world has started, and it’s not going to have a happy ending.

Currency values are the starting point, with the astonishing collapse of the British pound a pointer to how the game is played.

Government services must follow the downhill slide, or be funded by ever-higher taxes.

Western Australia got a whiff of what lies ahead via the recent announcement regarding electricity charges. Nationally, there is the opposition’s paid-parental leave scheme funded by a special tax, and then there is the certainty of higher taxes in the Henry Report, which should be released soon.

The common theme behind these issues of currency, government services and taxes is that they have their roots in the global financial crisis, and the way in which the GFC first bankrupted big companies, and is now bankrupting entire countries.

The best example of how the race to the bottom works in currency is to look at the British pound’s fall from 40 pence to $A1 to more than 60p (with much the same shift when measured against US dollars and the euro).

In theory, the collapse of the pound has made British exports more competitive, and that includes selling hotel rooms to tourists and education packages to prospective university students.

But, and this is a $64 zillion but – what happens if the governments of other countries actively encourage their currencies to fall to achieve a similar export boost?

The correct answer, in theory, is that nothing happens. That is, if all currencies fall we maintain the same alignment and no-one obtains an advantage.

Reality, however, will be different because the last thing the world needs today is a race to the currency bottom. Rapid changes in the value of different currencies can only create additional financial instability, confuse global trade, and produce as many losers as it does winners.

Australia is not currently playing the bottom race game, as can be seen in what appears to be a sharp increase in the value of our dollar, which is already hurting exports of education and tourism, and will eventually damage prices for more obvious exports such as raw materials.

For investors, the changes taking place in the financial world are a warning sign that we are entering a new phase of the GFC, a time when government debt causes the collapse of national economies.

Iceland and Greece are examples of what happens when a country goes broke. They will not be alone for long as governments struggle to fund the mountains of debt they took on in order to salvage the private sectors of their economies, especially failed banks.

This is a complex, tricky, and inter-connected subject, which will ultimately be reduced to a simple formula. Governments must do two things, neither of which will be politically popular: raise taxes and cut spending; or win the race to the bottom, with a depreciated currency and an inability to borrow on world markets.

Tough on Telstra

AT a corporate (and political) level there is another race to the bottom under way on the share register of Telstra, where the Australian government’s national broadband network (NBN) is hurting investors and employees.

During the past 12 months, as a war of words between Telstra and the government morphed into a pitched battle, Telstra’s share price has plunged, falling as low as $2.88 in early March, and making the company’s 1.44 million shareholders feel a lot poorer.

Impoverishing investors might be good socialist policy, but when it also means attacking a share register which represents the equivalent of 17 federal electorates, (roughly 85,000 voters per electorate) the political implications become somewhat more obvious.

Not many Telstra shareholders will change their votes because of a government attack on their company, but some will.

If Telstra shareholders are not happy, imagine how thousands of Telstra workers feel about the government’s use of the NBN as a battering ram to destroy a business it once owned.

Since listing in 1997, Telstra has operated a series of employee share plans which allow workers to buy Telstra shares at what are supposed to be incentive rates – below the ruling market.

Not any more. A quick check of the Telstra share plans shows that a series of them has embarrassing exercise prices. TSR options, for example, expire in September next year and have an exercise price of $4.90, about $1.80 above the current share price, or “out of the money” to use a financial markets expression.

In fact, of the 12 different share schemes currently in force at Telstra, all are out of the money with exercise prices varying from $3.67 to $4.90 – some incentive.

Lethargy on lithium

TOYOTA’S problems with sticky accelerator pedals have reached as far as the market for shares in companies exploring for lithium, the metal favoured for use in long-life electric-car batteries.

A few other things ought to have players in the lithium space even more concerned, such as the fact that forecasts for future use of lithium are astonishingly small.

The most recent predictions for lithium carbonate, the stuff which is used to make batteries, is that total worldwide consumption will rise from a current 110,000 tonnes to as much as 300,000t by 2020.

Optimists would say that this represents a 172 per cent increase. Yippee! Pessimists would point out that the increase will be spread over 10 years, and that Australia is not alone in getting excited about a metal which is not in short supply, and could quickly move into glut.

“If you want to get on in this world make many promises, but don’t keep them.”

Napoleon Bonaparte



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