The large companies in Australia’s two biggest ASX industries, banks and mining, are close to being at war with the government. But there is a major difference – the miners have the opposition on their side but the banks face an opposition that is even more anti bank than the government, if that is possible.
It’s many decades since we have had a situation where our two major corporate wealth creators are under severe parliamentary attack and both industries face decisions of enormous proportions.
As I will explain below, for the big miners to be taken seriously in this new round of their tax fight, Rio Tinto has to abandon its recently announced iron ore production increases.
Australian banks are treading their own perilous path. I warned on the eve of the October Reserve Bank decision that the banks faced a very dangerous situation if they lifted interest rates beyond RBA moves.
Whereas in the past the banks have been able to ignore flak from politicians over non-RBA rate rises, large segments of the community are now suffering because their borrowings are too high given the higher official interest rates.
That community ill-feeling is being reflected by an extremely aggressive anti-bank stance in the popular newspapers. At the same time we now have close to a hung parliament.
Shadow Treasurer Joe Hockey has picked up on the community mood and in an unprecedented statement reported this morning on ABC radio, Hockey has foreshadowed that the opposition might find the numbers in parliament to act against banks that raise interest rates above the level recommended by the Reserve Bank.
He has criticised the Treasurer, Wayne Swan, for not being effective in preventing the banks lifting rates by more than the increase in the cash rate.
Hockey says there are other levers Swan should be using, including punitive ones, and he says the parliament might act if the government does not.
“I think the banks have successfully intimidated the government into weakness,” he said.
Hockey is being unfair to Wayne Swan. Swan might not have threatened punitive action, but he has taken a very tough line against banks who lift interest rates outside the RBA increases.
It will be very difficult for the parliament take punitive action against the banks and if they did it would endanger the support of the overseas lenders which Australian banks depend on for about 40 per cent of their funding. That would bring on a severe economic contraction and result in much higher interest rates for the people Joe Hockey is trying to protect.
But I am not sure if the politicians would take much notice of that risk, so banks will need to look hard at whether they should bring on this war with the parliament. The RBA has cast doubt on bank claims that their borrowing costs have lifted, although as Stephen Bartholomeusz explained banks margins have fallen in recent months.
The banks’ mistake is that they have locked themselves into their offices and did not go out on the hustings to explain to the community their problems. The community view is now set.
That’s another big difference between the banks and the miners. The miners fought the original mining tax and that action was so effective that it played a big role in removing the Prime Minister. As Stephen Bartholomeusz explained yesterday, both the government and the miners are in a difficult situation. The miners are certain that the federal government’s offer included protection from state royalty increases. The government now realises that such an offer could savage revenues and now claims it did not make it.
My guess is that the miners will fight, but it will it be an easy war because there is no election on the horizon and those Rio Tinto production increases are relatively low cost and highly profitable. It won’t be easy to mothball them.
This article first appeared on Business Spectator.
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