Transcription of Finance News Network Interview with Commonwealth Bank of Australia’s (ASX:CBA) Chief Economist, Michael Blythe.
Lelde Smits: Hello I’m Lelde Smits for the Finance News Network and joining me today at the Resources & Energy Symposium in Broken Hill is Commonwealth Bank of Australia’s (ASX:CBA) Chief Economist, Michael Blythe. Michael, welcome.
Michael Blythe: Thank you.
Lelde Smits: Europe’s financial crisis is really pulling the market’s attention at the moment so Michael what I’d really like to gather from you the best, the worst and the most likely outcome we can expect in Europe?
Michael Blythe: Well the best option here is I think really is if a way can be found to kind of ring-fence Greece from the rest. Because, the problem has never really been the Greek side of things, it is a small part of the debt story, it’s a small part of the growth story. The real issue is if Greece gets into trouble then who’s next. And, as you move up that chain you tend to get more and more important economies dragged in. They’ll be bad news for everyone the further up that chain you go.
Lelde Smits: And what is the worst case we should be preparing for?
Michael Blythe: Well I think it is in the worse case that contagion where a way can’t be found to contain the problem to Greece, or to ring-fence the other economies that will potentially be in trouble as well. We’ve only got to look back a few years to see what happens when critical parts of your financial markets stop operating or stop working properly, everybody gets caught up in that. It’s very bad for financial markets and it’s very bad for the real economy that is financed by those markets as well.
Lelde Smits: Now global leaders have pledged to keep Greece in the euro, but the Greeks themselves will head to the polls on June 17, 2012: What do you believe is the likelihood of the Greek people choosing an anti-austerity government and in effect quitting the euro?
Michael Blythe: Well I think the issue here is the sort of problems, or the policies rather, you need to fix the problem involve increasing taxes, cutting government spending, that’s very painful. And, those sorts of policies are only sustainable as long as the voters are willing to vote for it. And, what we’ve seen in just the last few weeks is changes of government in France, the non-result if you like in Greece, that’s adding to the uncertainty in volatility in financial markets at the moment.
Lelde Smits: So Michael how long do you think it’s going to take to get European economies back to stability?
Michael Blythe: Well we can really only go here on the work of the experts who obviously look at these things very closely. The one that always comes to mind, the International Monetary Fund (IMF) they’ve done more projections on how long it’s going to take to get European debt levels back to sustainable numbers and the answer there is 2030. So they’re basically saying this is a 20 year adjustment cycle were we’re going through and unfortunately we’ve still got a long way to go in that case.
Lelde Smits: If Europe’s fiscal crisis continues to unravel, let’s examine the implications for Australia: The Australian dollar recently hit a five-month low, sinking below parity with the US. Where do you see the Australian dollar heading in 2012?
Michael Blythe: Well the Aussie dollar, it’s always seen as a bit of a barometer of global growth sentiment and a bit of a barometer of global risk appetite. And of course, what are we seeing at the moment, well, people revising down their growth forecasts and certainly risk appetite’s disappeared as well. That’s the sort of environment you’d have to think the Aussie will move lower. Our currency strategists think in the near term we may see something between 96-97 [US] cents. Longer term though, they’re still pretty positive on the Aussie. On our forecasts we have it at 105 by early 2013.
Lelde Smits: Commonwealth Bank’s CEO Ian Narev recently revealed the bank’s been preparing for a possible exit of Greece from the eurozone: Could you shed some light on what preparations have been taking place?
Michael Blythe: Well I think we’re lucky in Australia that we’ve had some very conservative bank CEOs and we’ve had some very effective banking regulators more broadly. So, that sort of preparation for the worst case scenario is something you’d hope that all banks are doing. But, I’d also point out I think that the financial system, not just here, but elsewhere is better placed to deal with the negatives than we were a few years ago. The Lehman’s event in a sense came out of nowhere. What’s happening right now has been obvious for a while, and yes, you’d hope the battle plans are in place.
Lelde Smits: So Michael, with fears over Europe’s debt and China’s slowing growth gaining momentum, it’s no wonder markets have panicked and shed all this year’s gains, but how much further can you see the ASX 200 falling?
Michael Blythe: Well, that is a question that is impossible to answer but clearly what you see at the moment, the loss of risk appetite, all the uncertainty there, then there certainly looks to be more downside than upside in the near term. As an economist though, I’ve always got to take a step back from the day to day gyrations and when you do you see an economy I think that is not so badly placed. The Asian region, the bit of the global economy that is important to us, is still doing pretty well. In the end, what happens in Asia will drive our growth and incomes in Australia. And that story, as I said, still looks good.
Unfortunately though, Europe is still in the box seat in terms of financial markets. And, whatever happens there we will see transmitted through to our markets. So, you could see a real divide between where the real economy goes and where the financial economy goes I think in the near term.
Lelde Smits: Finally Michael, the RBA (Reserve Bank of Australia) cut rates but 50 basis points in May, now sitting at 3.75 per cent: What do you think we’ll see the RBA do in June and this year?
Michael Blythe: Well we’ve got another rate cut in our forecasts, we have penciled in there for August, another 25 points, that will take the policy rate down to 3.5 per cent. That’s where we think they will stop. But, it really does depend of Europe. A genuine financial meltdown there, well, certainly we’d being seeing very aggressive rate cuts as we did a few years ago. And, that’s really a point I’d highlight as well, our policy makers are much better placed to help the economy than anywhere else. So we actually could cut rates a long way if needed. We could pump up the fiscal side as well if needed. There’s not many countries that could say that at the moment.
Lelde Smits: Michael Blythe, thanks for your time and insights today.
Michael Blythe: Thank you.