While I obviously don't agree with the remarks on Joe Hockey (who I think will prove to be an excellent and long-lasting Treasurer), and disagree with Soc Gen's views on rates/housing, their Asian bond market strategist, Christian Carrillo, is a thoughtful and entertaining guy. He adds value to the way we think, which is all you can ask. And his comments on Aussie bank funding costs were right--as the RBA's Guy Debelle subsequently pointed out--which most people did not understand (mixing absolute funding cost levels with changes in margins):
"As a bond market strategist, and someone who cares deeply about Australia, I had been very concerned about the seemingly blind pursuit of a Federal budget surplus in the short-term Treasurer Wayne Swan was apparently arguing for. My fear was that such strategy could turn out to be a "self-inflicted wound to economic performance" pushing it into recession, deepening housing woes and perhaps even risking one of the claimed objectives of the strategy: preserving the increasingly rare AAA rating Australian sovereign debt enjoys. I had expressed such fears very publicly, as many other commentators did recently, in the remote hope that pressure could emerge from public opinion against the Treasurer’s stated ‘surplus at all costs’ strategy. I shouldn’t have worried too much about it. Treasurer Swan is not really aiming for a surplus. That’s inherently a good thing...
[T]he AOFM announced today a bond issuance plan that would be consistent with a small deficit in FY12/13 ($9bn in net new nominal bond issuance). I am not worried about this at all. For the purposes of debt sustainability the key thing that matters is whether or not Australia is running a ‘primary’ budget surplus (a budget balance excluding interest payments). I calculate that a headline budget deficit around $15-20bn in FY12/13 would be consistent with a ‘primary’ surplus and should be more than enough to preserve market confidence. Indeed, Fitch said today "if the government does not balance the budget, this would not automatically have ratings implications." If anything Australia could run a larger deficit than what is being signaled by AOFM issuance plans and suffer no ratings consequences or lose market confidence. After this budget Australian bonds are likely to continue enjoying a ‘safe haven’ status in international markets.
It is thus with genuine astonishment that, right after Treasurer Swan’s speech, I watched Shadow Treasurer Joe Hockey on ABC News calling this budget “soft” and that the government "should go harder at it” to achieve a surplus without providing neither a rationale for the surplus nor any proposals to achieve that goal. Nothing. In my native Spanish language “nada”. I was wrong to worry Mr. Swan would blindly pursue a budget surplus regardless of economic conditions and I am glad to have been wrong. Mr. Swan’s budget may not achieve a headline surplus but if that is the case it would be for the right economic reasons. In contrast Mr. Hockey seems to be (very inarticulately) proposing a Neanderthalian approach to fiscal policy: keep hitting the economy harder. Australian people would do well to reject such primitive instincts."
