Questioning Joe’s $8.8 billion RBA hedge fund bet

ScreenHunter_39 Oct. 17 10.14

By Leith van Onselen

Fairfax’s Michael Pascoe has stepped-up his attack today on Treasurer Joe Hockey’s decision to inject $8.8 billion of taxpayer’s funds into the Reserve Bank of Australia’s (RBA) foreign reserve fund, which Pascoe claims will cost Australian taxpayers some $300 million in interest over the next 12 months:

Reserve Bank governor Glenn Stevens has effectively confirmed that Joe Hockey is blowing several hundred million dollars in an attempt to make his performance as Treasurer look good…

In a speech at a Sydney investment conference this morning, Stevens backed up comments by the RBA deputy governor last week that the bank was happy to rebuild its capital reserves over time. The RBA certainly didn’t ask for Hockey’s $8.8 billion capital injection and didn’t think it was necessary…

At the current five-year commonwealth bond yield of nearly 3.4 per cent, the borrowed $8.8 billion will cost taxpayers about $300 million a year. In opposition, Hockey used to make a big deal about the interest bill being racked up by government debt…

The last time the Aussie had a sharp fall, the RBA paid the government a dividend of more than $5 billion. Trader Joe is playing the forex market with borrowed money.

Last week the RBA deputy governor, Philip Lowe, said the level of the bank’s capital reserves had not been keeping him awake at night. The board had wanted to rebuild the capital level over time but the government wanted to do it immediately…

If Trader Joe’s forex bet pays off, it will all work out in the longer term, but forex is a notoriously dangerous game…

Perhaps it’s in-house advice instead from the former head of foreign exchange and global finance at Deutsche Bank, Melissa Babbage. Hockey is Ms Babbage’s husband.

Pascoe certainly doesn’t mince words in his criticism of Hockey. While I agree with him that Hockey is effectively speculating on the Aussie dollar falling using borrowed money, it is probably a bet weighted in his favour given the Aussie dollar’s current high valuation and the prospect of it falling over time as commodity prices trend lower.

Indeed, Hockey is likely also making a shrewd political gamble. Any near-term budget deficit – made worse initially by the $300 million in interest accruing on these borrowed funds – will be blamed on the former Government’s prolificacy as perceived economic mis-management. Then as the Australian dollar falls, and dividends from the RBA reserve fund flow to the Government, Hockey will be better placed to show improvement in the budget bottom-line and claim himself as a fiscal super hero.

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Unconventional Economist
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  1. Well when you’ve got Tony promising a surplus in 3 years + tax cuts, what other option do you have but to gamble? It’s too short term to try and build a rebalanced economy.

  2. Of course, it could simply be a case that:

    Borrow $9Bn this year, and the headline becomes Labor’s final year debt is X+$9B.

    Take the money back next year, and the headlie (sic) in the Australian becomes Coalition’s first year debt is Y$9B.

    Even without forex issues, Joe is on a winner – politically speaking that is. He has single handedly engineered an $18Bn turnaround in the country’s debt.

    Isn’t it great now the adults are back in charge?

    * “headlie” did I just invent an eggcorn?

  3. Relax, you guys have got it all wrong. Accoding to The Australian;

    “RESERVE Bank of Australia Governor Glenn Stevens has backed the Treasurer’s surprise decision to blow out the deficit to boost the central bank’s reserve fund, saying it would have taken years to rebuild the capital from the RBA’s earnings.”

    Also, why does a Newspoll suddenly appear the week after Abbott fights fires? This is not a shot at the PM rather a shot at what appears to be a very coincidentally timed poll?

    • Maybe Newspoll were waiting for Labor to figure out who they should put against him in preferred PM polls?

  4. Very pleasing indeed to see some commentators actually begin to take a little notice of the significance of the Usury damages.

    Well done Pascoe (and UE, natch).

  5. And this very supportive article is for a financial journo who is regularly ridiculed here on MB? Suddenly, Pascoe is the font of all forex and RBA wisdom? Let’s get the story straight.

    • The issue, Torynuff, the issue.

      The issue is why Joe has slapped 8.8 billion into the hands of the RBA when they didnt ask for it.

      The issue is why are we paying interest on borrowing that.

      The issue is if Joe us punting the AUD is going only one way (and it would appear quite logically that he is) then why doesnt he act on a few other implications of that.

      Sure Pascoe gets a shellacking here sometimes, but on this he is on a good wicket – there is an issue here.

    • “That was excellently observed’, say I, when I read a passage in an author, where his opinion agrees with mine. When we differ, there I pronounce him to be mistaken.”

      ― Jonathan Swift

      Such wisdom appears wasted on the likes of GSM

      Let’s get the story straight

      Sound advice, GSM, sound advice.

      You might try taking it.

    • Tassie TomMEMBER

      Fair point GSM.

      I guess the difference is that in this article he is not making financial predictions, and calling everybody else a fool for having a different opinion (and then being wrong).

  6. So the RBA gets 8 yards to sell.

    Isn’t it a good way to signal to the market the RBA is betting on a lower dollar?

    The RBA will sell the AUDs and buy the equivalent amount in government bonds in other currencies.

    So they’ll pick up a yield on their investment wait for the AUD to fall and make a tasty profit.

    If I had control of the AUD printing press that is exactly what I’d be doing.

  7. Seems to me this story is misleading at best.

    To begin with, in the speech yesterday Stevens said “It [the high Aussie dollar] led to a decline in the value of the Bank’s foreign assets and hence a diminution in the Bank’s capital, to a level well below that judged by the Reserve Bank Board to be prudent.”

    Without the injection, there almost certainly wouldn’t have been any dividends paid by the RBA for quite some time. So, the interest cost on the capital may well be offset by the resumption of dividends.

    As for characterising the injection as Hockey making an FX punt, that seems kind of ridiculous. The RBA will presumably do whatever it was going to do and in any case, ultimately the government is always on the hook.