Professor Fariborz Moshirian

Borrowing costs in Italy have surged above 7 per cent, which has triggered a large sell off of French banks that hold much of Italy’s debt, and this has caused volatility in share prices around the globe.

The present turmoil will continue for some time to come, and the spotlight is now fully on France, where bond yields have jumped because its financial institutions have a large exposure to Italian debt, and have the most to lose from Europe’s debt crisis.

I think the country has no choice but to sort it out themselves.

They can’t run to the G20 for a hand out. Italian debt is around two and a half trillion euro – way too big for the European Financial Stability Facility to fund a bail out. The IMF certainly doesn’t have capacity to do that so the Italians have to do most of work to reduce their debt, make the economy more efficient, and reform the Italian labour markets. Italy is going through a major challenge at the present time. However this reform will be worthwhile in the long run and the current crisis could actually accelerate the process.

There are also major challenges facing Greece. I think now the Greek people have a clear choice. They can stay in the eurozone, or cut and run. However 70% of people in Greece say they would like to be part of the eurozone, and that means they have to now fast-track their reforms rather than agonise about them. If they did leave the eurozone, things would be very difficult. Their new national currency – call it the new Drachma – would be devalued by 50%, and that would increase the debt of all companies by 50% because everything at the moment is measured in euro on the balance sheet of companies, and so they could create more problems for themselves if they leave the eurozone. The citizens of Greece want to stay in – and it would cause huge problems if they leave. Therefore, I think they should stay in the euro.

Indeed, the road ahead for Europe looks bumpy. There are many more challenges. It’s not as if leaders got together at last week’s G20 and agreed to some specific measures which are a magic cure. We should unfortunately expect more volatile times ahead; both for countries within the eurozone, and for countries like Australia, where the stock market rises and falls because of concerns about the global economy. We may think we are insulated from the problems down under – but we are not.

France has a major problem with its bond yields, and it needs to look at the medium and longer term vision of the eurozone to see what it can do beyond austerity measures. It needs to create economic growth. Ultimately some eurozone countries might need more support from China or other solvent counties to ease the problem.

Fariborz Moshirian is a Professor of Finance at the Australian School of Business.

Tim Harcourt 

The annual APEC summit has just concluded in Hawaii. The summit ended optimistically, and it could be just the chance Australia needs to boost trade over the entire Asia Pacific region, according to a senior economist at the Australian School of Business.

Prime Minister Julia Gillard, US President Barack Obama and the heads of seven other nations have now reached an agreement on the broad outline of a new trade regime known as the Trans-Pacific Partnerships (TPP).

I feel the announcement of the Trans-Pacific Partnership is good news for Australia and good news for the region as a whole.

Trade initiatives are important for workers as well as business. Exporters, on average pay 60 per cent higher wages and provide more job security than non-exporters.

Prime Minister Julia Gillard and Trade Minister Dr Craig Emerson are to be congratulated for forging the most important initiative since APEC itself was created by the Hawke-Keating Government.

At the APEC summit opened by US President Barack Obama, the APEC members also agreed to cut tariffs on environmental goods to five per cent, as part of a push against protectionism, which grows at times of global economic instability.

Exporters will experience the benefit from being able to get environmental products which we produce into the economies of APEC countries at a lower tariff, and this can only be good news for Australian manufacturing.

The rest of the talks on world trade didn’t go as well, and there has been a lack of progress in negotiating a multilateral agreement following the Doha Round of world trade talks. However I do hope that the APEC talks will achieve a breakthrough. In 1957 Japan helped Australia get into Asia by forging a commercial partnership with Australia, just 12 years after World War II. With the TPP, Japan has supported what could be the most significant trade partnership to date in the 21st Century. Hopefully APEC can get things moving.

Indeed, Australians need to be aware of what is happening in the world. With Greek debt, Roman ruins and Europe in difficulty, it is important the world turns to the Asia Pacific region to be the economic engine of global growth and TPP will help add to this momentum.

Tim Harcourt is the J.W.Nevile Fellow in Economics at the Australian School of Business UNSW and the author of The Airport Economist: www.theairporteconomist.com.

Professor Larry Dwyer

The Qantas dispute may be far from settled, but by giving away thousands of free tickets, the airline will kick-start a mini boom in the tourism sector.

Australian holidaymakers may need reminding of the allure of the attractions that are right under their noses. And with domestic travellers representing three quarters of Australia’s tourism market, it’s an area that resorts need to capitalise on.

Qantas’ offer of 100,000 free air tickets to customers stranded by last week’s decision to ground the airline for 24 hours appears to offer a chance for domestic tourism to capitalise on those who will travel much further than they normally would for the two years of the offer, which gives away a free return flight to anywhere in Australia from December 14th.

In Australia there is a lot of goodwill towards Qantas and a lot of affection for the brand: we think of it as ‘our’ airline. So at the start of the dispute I think the public was more on side with Qantas and its need to restructure than it was with the unions, however, I think Qantas has lost a direct proportion of that goodwill in terms of what it’s done, the timing of it and so on. Now, this is a chance for them to buy some of that goodwill back, and get passengers back on a Qantas plane, which many of them may not have considered.

In Australia six out of ten tourism operators are reporting forward sales to be worse or much worse than they were, according to a recent Mastercard survey. I would certainly expect that those resorts are looking forward to plenty of bookings from those who plan to use their free tickets to go to as remote a destination in Australia as possible: Sydney residents for example are already looking at Broome as a way to use their tickets – and these resorts have been hit hard by the downturn. Equally those on the west coast may now be looking at staying in the party resorts in Cairns.

However we must remember that not only were customers severely disadvantaged in terms of their travel plans but because tourism is a global network the impact was felt all over Australia and as a result of that there was widespread impact on the Australian economy. The Qantas initiative will also go some way to gaining support from industry stakeholders around Australia who felt badly let down by the Qantas lockout.

However the boost to holiday tourism and Qantas may only be temporary. It appears that Qantas was simply not geared up to meet the crisis head-on and, of course, that further eroded customer confidence in Qantas management. What Qantas has done by the lockout is to force many customers to trial Virgin Australia. Now, of course, a good percentage of those will now continue on with Virgin. The big area where there’s going to be competition between Qantas and Virgin in the future is in the area of business and government travellers. They pay a premium, they’ve been disadvantaged, and it’s an area that Qantas can’t ill afford to lose.

Larry Dwyer is a Professor in the School of Marketing at the Australian School of Business.

Michael Peters

After 21 years of mandatory superannuation there is almost as much money in Australian superannuation accounts as there is in bank deposits.

If you look at the longer term “sticky money” and take out short term bank deposits, then the $1.2 trillion superannuation industry is way in front. By this time next year, superannuation should be streets ahead, by any measure.

This is why it makes sense for APRA to start treating superannuation accounts in some of the same ways it treats bank deposits held in Approved Deposit Institutions (ADIs), and this is one of the key themes of the governance discussion paper released this week by APRA.

In essence, the defining principle of the reforms is that super should be as safe as money in the bank. Superannuation and real estate will soon be Australians’ biggest private investments, so super should not only be as safe as the bank, but safe as houses too.

This is not purely altruistic, of course. Our regulators are terrified at the thought of a financial disaster hitting our superannuation industry. It is a national nest egg which needs an amount of protection, otherwise the impact on the public purse and retirement lifestyles would be catastrophic.

The sagas of Westpoint, Trio Capital, Storm Financial and Opus Prime were well documented but small in scale. If that happened across the industry, though, it would be a tsunami of national disaster.

APRA’s new discussion paper on superannuation governance addresses some of these issues as the regulator prepares to take over the industry from 2013.

Up until now, there’s been very little legislated capital adequacy for superannuation funds, and virtually no liquidity rules and little in the way of regulated transparency. Superannuation has been almost an afterthought for the financial sector.

The concept of operational risk reserves has been completely unknown. Our auditors only look at funds when money goes missing and don’t judge performance in the same way as European regulators “name and shame” poorly performing funds.

The reforms may not go so far as the equivalent of a deposit guarantee on super accounts, but were are heading in that direction. The draft paper is important as it places super at the top of the finance regulatory agenda, so it makes sense that it should be protected by a watertight regulatory regime, and even by a guarantee.

There is little point in Governments changing the rules over the years to make superannuation the nation’s preferred savings vehicle if the regime does not also deliver adequate protection.

There is no doubt that the changes will mean more red tape, more compliance fees, and will further drive the wave of consolidation among the super funds. It will probably also mean less volatility in fund performance. Given the importance of superannuation not just to individuals but the nation as a whole, these are necessary inconveniences.

Less lamented will be the end of the well-known perks enjoyed by fund managers. Most people have no idea of the multi-level fee structures in their superannuation funds. In the 21 years of the mandatory regime, clients have been burned alive.

Accountability for service and performance is APRA’s great challenge, along with minimizing risk. The draft changes show they are up for the challenge.

Michael Peters is a lecturer in Business Law and Taxation at the Australian School of Business at the University of NSW. A version of this opinion piece appeared in the Australian Financial Review on Wednesday 5 October 2011.

Professor John Piggott

By anyone’s count, 7 billion is a lot of people. But it’s worth bearing in mind that the number could have been much higher. In 1965, the total fertility rate (an estimate of the number of live births in a woman’s lifetime) across the world stood at 4.9. If that rate had been maintained, the global population would be growing towards 15 billion by 2050, instead of 9 billion plus.

What’s changed is how many children each woman has, on average. The UN estimates that currently, the total fertility rate is about 2.5 globally. That same organisation projects fertility falling to 2.03, somewhat below replacement, by the end of the century.

At the other end of the life span, life expectancy at birth has increased from 56 in 1965 to 68 today. This increases population, of course, but not by as much as the reduction in fertility reduces it.

But these two trends imply a third, not much discussed when attention is focused on just the total, and that is population structure. The ageing of the population is a happening phenomenon in countries such as Japan, the world’s oldest. In these countries, low fertility has led to a range of economic and social challenges. These are well rehearsed at the level of a single economy – fiscal stress because so much support for the aged is provided by government; an older and generally less flexible labour force; a decline in entrepreneurship and innovation; challenges in caring for the aged; and so on.

Policies directed towards increasing fertility are therefore frequently encountered, because age dependency ratios are projected to move so rapidly, as the working population peaks and then declines, and the baby boomers retire and live longer.  The UN lists 47 countries who believe their fertility is too low, and 43 of these have policies aimed at raising the fertility rate. Australia is among the 43.

But the best policies for higher fertility are indirect. The decline in fertility in the 60s and 70s stemmed in large part from the increase in women’s labour force participation, perhaps the largest change in labour markets in the last century. Countries with superior childcare facilities, and attitudes of acceptance towards mothers of young children in the labour force, tend to have higher fertility rates than those where this level of social support does not exist.

From a global perspective, the age dependency ratio, which may be thought of as the ratio of the retired population to the working-age population, has moved from 9% in 1965 to 12% today, and is projected to more than double, to 26%, by 2050. And while countries whose population are already shrinking, such as Japan’s, find this challenging, this dynamic at a global level is much more dramatic. For centuries, a gradually expanding population has kept economies growing and societies dynamic. We don’t yet know what will happen when we can no longer rely on that future.

John Piggott is a Scientia Professor of Economics and Director of the ARC Centre of Excellence in Population Ageing Research (CEPAR) at the University of New South Wales.

Laurel Hixon

In its boldest recommendation on the future financing of aged care, the Productivity Commission proposes that housing and related living expenses be “unbundled” from the care costs and become the responsibility of the individual.

That makes economic and social sense, but also comes with a set or risks both for public sector funding and also for the individual which need to be navigated carefully.

Among the extensive recommendations included in its recent report “Caring for Older Australians,” the Productivity Commission has attracted attention for recommending that relatively sophisticated financial instruments—equity release schemes or reverse mortgages—can help people pay those reasonably predictable living expenses while the government continues its commitment to the more health-related costs of care. This explicitly acknowledges the need for combining private responsibility and public risk-sharing in the most sensible way.

Tapping into the equity in the family home presents a practical and viable solution to at least part of the aged care dilemma for some Australians. Housing wealth in Australia represents about half of total private assets, and using part of that wealth to fund care is a solution to two issues: the very real desire of people to stay in their homes and the wider public policy issue of transferring some of the cost of care to the private sector. Nearly 78 percent of older Australians own their homes outright, without mortgages.

Economic theory supports this approach as well. In health care, it has been well demonstrated that, if a person does not know when or whether they will need care, and the cost of that care is expensive, then insurance is needed to spread the risk over people. The private market does not work well in these situations. On the other hand, the housing and living costs, which are more predictable, are efficiently and equitable distributed in the private market and with greater consumer choice.

The Productivity Commission is especially committed to making greater choice available to aged care consumers in terms of the mix of services they receive, where they receive services (at home, in “age-friendly housing” or in a residential care facility), and from whom they receive those services. They have put forth a number of recommendations related to this goal.

In particular, they wisely recognize that these choices often change over time and have recommended that the Government remove a major financial disincentive to selling one’s home when the choice is to move to a more supportive care environment.  Rather than have the proceeds from the sale of a home result in the loss of eligibility for the Age Pension, people may invest those proceeds in a government-run savings account.

Taken together, these initiatives work both on a human level and also on a financial level. For Governments, there is a looming financial imperative. According to the latest Intergenerational Report, the share of the budget committed to aged care will increase from 3 percent in 2009/2010 to 6.6 percent of total Government spending, or 1.8 percent of national GDP, by 2049/50.  The central theme of the Productivity Commission report is a discussion of the relative roles that the public and private sectors should play in aged care financing.

With regard to both health care and retirement income, the Australian government has taken the approach of moving greater responsibility “off budget” and on to the individual and private sectors through private health insurance subsidies and mandatory superannuation schemes. As aged care services interface with the health care system and aged care financing is closed linked to aged pensions, it follows then that Government will seriously consider the same strategy for addressing the future growth associated with services needed to care for an ageing population.

Already, Australia has a strong public policy commitment to retirement savings through the compulsory superannuation scheme. Increasingly, superannuation and equity in the family home will become the basis for individual wealth in Australia and the Productivity Commission focuses on these as the source of individual funding to help the increased cost of aged care. But, as we transition to any new system of shared responsibility we need to understand better the parameters around these.

Finally, if there is any weakness in The Productivity Commission’s report it is this: the central assumption that more choice is better is not necessarily backed up by data and up to date research. Recent academic* work has shown that people’s actual choices often do not reflect their true preferences and best interests. Choice reflecting personal preference is a laudable goal but, operationally, this is not easy to implement.

Without making choices easy-to-understand through better information and research, we open up a whole new world of risk we can ill-afford.

Emphasizing the desire for choice has several risks. On the side of the government payer, there is a risk that, by putting choice in the hands of the consumer, public dollars will not be spent in a way that creates the largest public benefit.

On the side of the older person and their family, they may become overwhelmed and frustrated by the responsibility of making meaningful choice out of a large number of options. Or, in the case of rural and remote communities, the consumer may realize that meaningful choice simply isn’t available. Neither of these situations makes anyone better off.

Laurel Hixon is a Senior Lecturer and Research Associate at the Australian Institute for Population Ageing Research at the University of New South Wales.

A version of this opinion piece appeared in the Australian Financial Review on 15th September 2011.

Nina Mistilis

Qantas has unveiled plans to axe 1000 jobs, retire elderly aircraft, and cut routes. It’s not surprising – Qantas needed to take some action urgently, because it was haemorrhaging money and customers.

Airlines typically have low profits and operate in a highly competitive environment. Given the lessening airline protection in the Australian market, these bold actions are long overdue.

Qantas is to lay off 1000 staff, scrap four Boeing 747s, and defer delivery of the final six A380s by up to six years. It will also scrap the long-haul route to Buenos Aires, while launching Jetstar Japan as a new low-cost carrier, along with another new premium airline based in Asia, with a new name, new aircraft and new look.

It was high time Qantas took action to cut back on unprofitable routes, and take bold action with some of it’s more aged fleet. The Boeing 747s are now getting quite long in the tooth, and they need to be retired and replaced with more fuel efficient aircraft.

Qantas has reviewed its offshore operations to cut costs and unprofitable routes. It will launch a new, premium Asian airline and a Japanese budget carrier – the latter jointly with Japan Airlines and Mitsubishi – flying Airbus A320 jets.

It makes sense for Qantas to look at cheaper more efficient Airbus aircraft, that cost less to run. Qantas plans to acquire up to 110 Airbus aircraft, worth more than $9.4 billion at list prices.

However with the Australian dollar hovering close to parity, the Australian dollar is very high and that deters tourism to Australia, and tourists from overseas flying on Qantas. We have seen more Australian’s wishing to fly overseas for their holidays, but in turn they may be switching from domestic destinations. That is equally going to impact the bottom line at Qantas.

Nina Mistilis is from the Tourism & Hospitality Management Group within the School of Marketing at the Australian School of Business.

Dr Jonathan Reeves

An array of forecasts for Australian house prices ranging from modest rises to dramatic falls currently exist. These large forecast differences are primarily explained by the dataset used by the forecaster.

Most Australian forecasters rely on Australian house price index returns, rather than overseas house price index returns. Whereas, overseas forecasters of Australian house prices, often combine both Australian and overseas house price index returns in their analysis.

The major limitation with the Australian house price indexes is that most commence around the early 1980’s. Providing a relatively short sample of approximately thirty years of quarterly data. Whereas, in the US and Europe house price index data exist for over one hundred years.

Australian inflation adjusted house price indexes display substantial average growth rates over the last thirty years, whereas the US and European inflation adjusted average housing growth rates over the last century are relatively modest.

When Australian house price returns are modeled over the last thirty years, typically correlations are measured between house price returns and factors such as population growth and interest rates. These models have some usefulness in forecasting three to twelve months ahead, though generally are not suitable for longer range forecasting.

Housing for most investors is a long term investment. Thus forecast horizons of three, five and ten years are more relevant than the three to twelve month horizon. For these longer range forecasts, there is simply insufficient historical Australian data available for reliable models to be constructed.

Instead, Australian forecasters should more often use overseas data on the long run behaviour of house prices. In the practice of forecasting, it is often found that the relatively simple models are the most reliable.

In house price modeling with US and European data over the last century, the simple model of long run average house prices being a multiple of four times the average gross household salary, has proved to be a reliable guide. This multiple of four is the average over many decades, with periods where the multiple is above and below.

For example, before the global financial crisis, the multiple in the US was over six and now it is currently three. The economic rational behind long run house prices not staying above a multiple of four for long periods, is that households simply can not afford this through all phases of the business cycle.

Currently in Australia the multiple is over six and thus likely to fall. Otherwise, by current comparisons to other developed countries and by comparisons to the historical record of house prices in many countries, Australia would be exceptional.

Some forecasters consider there to be a shortage of land in Australia. However, this is at most a short run factor as governments have the ability to rezone land for higher density housing.

The magnitude of a fall in Australian house prices will most likely be influenced by overseas events. The most immediate threat may come from the European sovereign debt crisis and the impact this could have on raising mortgage interest rates in Australia. Business cycles transmitted by China are also a high concern, along with the performance of the US economy.

In addition, falling house prices in New Zealand, with a weak New Zealand economy, may have substantial impacts on Australian banks operating in New Zealand.

In contrast to other developed countries, Australian house prices rose in 2009 and 2010. Australia’s rise was due to the government stimulas package that included specific housing stimulas. With the stimulas effects fading in 2011, Australian house prices have started to decline. It is likely that this is the beginning of a substantial housing correction.

Dr Jonathan Reeves is a financial economist at the Australian School of Business, University of New South Wales.

A version of this opinion piece appeared in the Australian Financial Review on the 19 July 2011.