Australian SWF head attacks European leaders, urges closer political union

The head of Australia’s sovereign wealth fund has launched a harsh attack on eurozone’s political class, saying the bloc’s debt crisis stemmed from “a failure of government to understand the nature of financial markets and to stop the level of indebtedness of countries”.

David Murray, chair of Australia’s AUD $75.2bn Future Fund, said: “Those elected to political life have to understand the limits of debt they should have, and their responsibilities.

“It is quite clear the latest crisis was caused by the failure of governments, which stood by while easy monetary policy inflated assets beyond sustainable value. [Politicians] were seeing a leveraging up in the private sector, and they were leveraging up in the government sector, too.”

In contrast to many eurozone countries with debt to GDP ratios of over 100%, Australia’s ratio is less than one fifth of that.

Its USD $1.23trn economy has benefited recently from strong prices for commodities demanded by China.

While Greece, Italy, Portugal, Ireland, Spain and Cyprus have all been downgraded by various ratings agencies so far this year, Australia had its federal AAA long-term rating confirmed by Standard & Poor’s last week, although separately one state’s rating was cut.

David Murray’s words, delivered yesterday via Australia’s public broadcaster, came on the same day Australia’s Treasurer Wayne Swann said the eurozone’s politicians must “act together to ensure what can be done is done.”

He spoke from a meeting of finance ministers of the world’s richest 20 advanced economies in Washington. “When it comes to Europe, its commitments need to be implemented. We already have five central banks there to support the [eurozone’s] economies, to work with Europeans. We are all still living with the ongoing impact of the global financial crisis and despite the fact Australia’s fundamentals are strong, decisions [elsewhere] hit our markets, and that is why we are so keen to work on global responses.

“We must ensure the appropriate tools lare available, particularly through the IMF, to assist the Europeans, if and when that is required.”

Speaking from the same meeting, new IMF head Christine Lagarde said: “There was not denial or finger pointing [at the G20 meeting], it was about recognition and support.”

Murray advocated closer political union in Europe, calling the eurozone “a loose federation, which will have to change. We really need Europe’s leaders to sort this out, and come up with a different kind of political model.”

Murray said Germany had been a “huge beneficiary of a weaker euro”, and would have to shoulder much of the burden to repair the bloc. If the common currency collapsed and Germany had to revert to the deutschmark, he warned Europe’s largest economy would probably see its GDP fall by 25%.

Murray said Australia’s Future Fund, established in 2006 to help its governments meet public pension liabilities, was defensively positioned while it remained unclear if the world faced higher inflation devaluing debt, or disinflation and lower growth. The latter outcome now appears more likely, Murray said.

The Future Fund is mandated to achieve return of inflation-plus-5% over rolling 10-year periods.

In its latest portfolio update, it announced gains of 12.4% in the financial year to 30 June, excluding its market-weight holding in privatised telecom operator Telstra.

Over three years it made 6% a year. Since inception in May 2006, it made 5.2% per annum.

Murray said: “Investors are so concerned about may happen in Europe, they are taking views on liquidity and currencies, and making adjustments. No-one knows which political strong decisions will be made by European leaders, and the extent of fiscal turbulence in Europe. Therefore they are uncertain about which assets to invest in.”

 

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