14/07/2011 - 00:00

Weaker states may give us our own ‘piggies’

14/07/2011 - 00:00

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Is Tasmania Australia's 'Greece'? The numbers appear eerily similar.

Australians like to think of their country as being a lot healthier than Europe, especially when it comes to economic growth. In fact, we’re alarmingly alike. We both have ‘sick states’.

Just how sick is obvious in Europe where the PIGS – Portugal, Ireland, Greece and Spain – are near financial collapse, potentially killing the common currency, the euro and risking the future of the entire European ‘experiment’ in nation building.

In Australia, the sick states are not severely damaging the rest of the country, yet.

But, as Europe is showing, you can’t have one part of an ‘economic organism’ requiring constant financial support from other states without causing long-term trouble, eventually slowing the whole and potentially infecting the entire nation with its lazy ways.

Australia’s ‘Greece’ is Tasmania. Its ‘Portugal’ is South Australia. In a few years, Victoria could become our ‘Spain’.

Proof for that somewhat controversial comparison can be found in an assortment of statistics, with an impartial observer in the form of Germany’s biggest bank, Deutsche Bank, conveniently providing a detailed breakdown of the financial performance of Australia’s states.

In its latest assessment of the states, the bank notes with some alarm that since the 2002-03 budget season, the “states’ combined general government expenditure has grown more than twice as fast as has been budgeted for”.

Translated into English, that would appear to be saying that every state budget for much of the past decade has been a lie.

But, apart from excess spending, there is another key point which separates successful states from the unsuccessful and that’s the share that governments have of each state’s economy.

As a rough rule, government expenditures represents about 40 per cent of the economies of Tasmania and South Australia and about 30 per cent of the other states.

Consider a few more numbers. Tasmania’s share of gross national output has fallen to just 1.8 per cent (Greece is 2 per cent of Europe). South Australia is down to 6.3 per cent. Western Australia’s share of the national economy is up to 14.4 per cent.

Real state final demand, a fancy economist’s measure of economic activity, shows that Tasmania shrank 0.9 per cent last financial year. South Australia grew 1.9 per cent and WA expanded 6.8 per cent.

Worst of all, Tasmania’s population ‘growth’ has dropped below one per cent compared with more than one per cent for all other states and 2.1 per cent for WA.

Then there are the more troubling questions, such as:

• What is it that Greece and Tasmania actually produce that the world wants?

• How can the sick states of Europe and Australia grow when they are locked into a high-value currency, which is killing their chances to be competitive?

Years ago, the slide of Greece into economic oblivion was obvious to all but Blind Freddie though, amusingly, his dog could see the problem.

It went like this: back in 2007, Greece exported goods and services valued at $US15 billion and imported goods and services worth $US51.6 billion – providing the first clue, a whopping trade imbalance.

After ‘invisibles’, which in the case of Greece would probably be its large shipping fleet, the current account balance was a negative $US13.1 billion, or 6.4 per cent of gross domestic product. English translation: “You’re going broke.”

By 2010, the Greek current account balance was negative $US44.6 billion, or 14.1 per cent of GDP. English translation: “You are broke.”

Tasmania, and perhaps Australia’s other little piggies, are travelling the road to Athens. They import more than they export. Local industries are being crushed by a high exchange rate (tourism, wine, manufacturing, education) and government is plugging the gap with taxes raised elsewhere in the country.

However, given that Australia is not going to bust up (as Europe probably will) there has to be another way of sparking some life into the moribund parts of the country before they become terminal basket cases, surviving solely on a drip-feed of handouts from Canberra – which gets its cash from the successful states.

More collateralised

As another sobering thought and, in keeping with that traditional game of spotting the first daffodil of spring, is it possible that we can see the first seeds of the next bank-induced global financial crisis?

In the US and Europe the latest ‘game’ for investment banks is to own the warehouses which store much of the world’s metals.

Goldman Sachs, for example, owns an estimated 100 warehouses in which it stores copper, aluminium and nickel. JP Morgan Chase is doing the same thing.

At first blush the banks appear to be mimicking the commodity-control systems which lie at the heart of trading companies such as Glencore and Noble Group in which they buy, ship, store and ship again myriad commodities ranging from soy beans to coal – peeling a fee off at every stage of the process.

If that is all that Goldman and Morgan are doing then the best of luck in this new money-making venture.

Unfortunately, it is highly unlikely the banks will stop at being warehouse operators and trans-shippers.

They will be looking at ways to leverage off their control of valuable commodities in their warehouses just as they leveraged off their control of the home mortgage market in the US and other forms of debt.

It was the clever chaps in investment banks who gave us sub-prime mortgages and collateralised debt obligations (CDOs), which failed so spectacularly.

So, will we soon see a CCO (collateralised commodity obligation) heading our way, eventually inflicting the same damage on commodity producing countries (Australia?) as the CDOs did to the US and Europe?

Spun out

Spin reached a new level in Perth last week when accounting firm Deloitte sent out a media statement headed: “IPO activity in WA continues recovery in FY11” – which is beancounter speak for Perth having lots of floats last financial year.

The problem, which comes from the chapter in a medical handbook headed “the operation was a success, though the patient died”, is, that of the 10 biggest WA-based floats named by Deloitte, seven were flops with only three trading above their issue price at June 30.

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“Formula for failure: Try to please everybody.” Herbert Bayard Swope.

 

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