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Overcoming glitches in the systems

BETWEEN 1990 and 1993 Australian business had a number of high-profile failures. Companies such as Bond Corporation, Qintex, a host of building societies and all variety of financial institutions went the way of all flesh and died what were, in a number of instances, fairly painful deaths.

The cavalier approach applied to lending at that time even threatened the existence of some of our banks. Now, approximately 10 years later, are we heading the same way again? This year we have seen a steady stream of high-profile collapses, such as HIH, Harris Scarfe, One Tel, Ansett and Pasminco. Combine this with the increasing numbers of corporate bankruptcies and we are starting to raise the fear that we might be about to experience a rerun of the 90s. Of course, at that time, the loss of wealth and jobs brought on the economic slump soon thereafter.

There are conditions today that would suggest that this is but an idle fear. One of the most obvious changes between that time and now is the strength of the corporate balance sheets. Back in the 1990s, debt-to-equity ratios were more than twice as bad as they are today. This alone would mean that the level of vulnerability of a company to an economic downturn or collapse in asset prices is reduced. All of us who remember the era of the entrepreneurs, when banks were lending on spurious valuations and possible cash flows without adequate regard for the level of debt to equity held by the company, will understand the marked difference to the current corporate balance sheets.

Another major factor at work then, which is not in place today, was the artificial asset price bubble that we had in the 1980s. The share price surge of the 80s was quite staggering. Remember when all new floats would come on to the market approximately 10 times their issue price, irrespective of the quality of the assets held by that company? Heady days indeed.

Those asset price rises were, in fact, what underpinned the surge in lending by the banks. The current asset prices cannot be said to be inflated, artificially. While there is no artificial inflation of the prices, there is unlikely to be any bursting of the same price bubble.

The twin bogeys of the 80s and 90s in Australia were inflation and interest rates. Neither of these is major factor today. Inflation is well within the RBA’s accepted band.

This, in turn, has taken the pressure off the RBA so far as interest rates are con-cerned. The cutting, by the Federal Reserve Bank in the US will only serve to put further pressure on our RBA to cut rates at its next meeting in early December. This has meant that the debt servicing costs of most companies are very much more affordable and relieved a great deal of the pressures that they had felt before.

This all leads me to the view that, while there is little doubt that there has been a rise in the level of corporate failures, including a couple of reasonably high-profile failures in recent months, we are hardly likely to go through a scenario similar to that witnessed back then. Market conditions and the condition of the balance sheets of the large corporates in Australia will ensure that these failures are very much a glitch in the system and not an indication of a far more pressing problem that is systemic or endemic in this country.

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