Bob McMahon

Several days ago the pundits had changed their tune following the Centro avalanche, because the problem wasn’t confined to the domestic housing market, nor was it peculiar to the USA. Britain got clobbered. Now it’s Australia’s turn. Some of you might be puzzled as to how this meltdown could possibly be good news for Tasmania? It is good news because risk capital suddenly got much more expensive, or even impossible to get, not just in Australia but worldwide. Risk capital got a whole lot riskier if you were in the market, like the ANZ, to supply a couple of billion to finance a dodgy business in Tasmania…

“AS COLD waters to a thirsty soul, so is good news from a far country.” Thus spoke King Solomon (Proverbs 25.25). His wisdom resounds down the ages and brings good cheer to the Tamar Valley in this Christmas week of 2007.

Where is this ‘far country’ and what is the ‘good news’?

The far country is America. The beginning of the good news, the incipiently good news you might say, occurred a few months ago. That was the start of a ‘credit squeeze’ in America due to the subprime mortgage crisis.

Loan defaults in the housing market, in particular the 3.5 million ‘homeowners’ who were sold loans they had no chance of repaying over the long term, or even the short term, sparked the squeeze.

No problem for us in Australia, the local economists assured us, because we did not go in for subprime type lending, that is, reckless lending to mortgagees (or companies?) with insufficient assets or cash flow to make loan repayments. We have been altogether more circumspect in Australia. We were immune from that sort of thing we were told. No mention of companies like Centro with assets and exposure in the USA.

Several days ago the pundits had changed their tune following the Centro avalanche, because the problem wasn’t confined to the domestic housing market, nor was it peculiar to the USA.

Britain got clobbered. Now it’s Australia’s turn.

Companies, like Centro, which are highly leveraged – short term borrowing, bridging finance at high rates that have to be re-negotiated, borrowings at a high proportion of assets and earning potential etc. – are in for a rough ride. There are a lot of shareholders and investors in superannuation funds exposed to speculative property trusts which surfed in on the big wave of credit expansion, who are feeling rather sick right now. So much for our immunity.

Now the really good news flashed up red on the screen when the squeeze turned into a meltdown, which the US Federal Reserve was unable to control with interest rate cuts and wads of money shovelled into the banks to soften the impact, on them, of their own junk loans.

Once the credit squeeze ceased to be a mere liquidity problem and started to look like a money market collapse, prescient Tasmanians dared to quietly rejoice and put off their Christmas shopping for a day or two to watch the screens instead: Bloomberg, Squawk Box, Sky, ASX etc.

Some of you might be puzzled as to how this meltdown could possibly be good news for Tasmania?

It is good news because risk capital suddenly got much more expensive, or even impossible to get, not just in Australia but worldwide.

Risk capital got a whole lot riskier if you were in the market, like the ANZ, to supply a couple of billion to finance a dodgy business in Tasmania spruiked by a hurdy-gurdy of Scandinavians who had taken advantage, if the truth be known, but the Scandinavians would be the last to say so in public, of a board of dimwits.

Yes, that’s right. At a time when pulp mills all over the developed world are closing down because they can’t possibly compete with the developing world (the ‘global south’) or are being bailed out of insolvency with mountains of taxpayers’ money.

The Finns were able to flog off a stupendously smelly, long dead fish disguised as a rainbow trout flashing silver in a mountain stream, to Dad and Dave and the bastard from the bush. Taken advantage of, you might say. Pretend international players taken for a ride by real international players.

Serve them right you might say. Let them borrow their two billion, let them borrow twice as much as the company is valued on the stock market, let them be leveraged so highly the earth is dislodged from its orbit around the sun, let them build the pulp mill, because, by 2010 the world will be a meaner place with rat devouring rat and nobody will want the world’s most expensive and environmentally ghastly pulp and the company will be doomed.

I know many readers might think that is justice on about the right scale given the level of contempt shown by the pulp mill proponents (and complicit governments) for the concerns of the people.

I would disagree, but not out of any love for the company. Let it be napalmed from a great height one part of me says.

But another part of me says let it survive and be marinated in the odium of the people until such time as it changes its ways and the current board of directors is gone to where boards of directors on the dark side go, but let us not have the pulp mill, not any cost, not even at the cost of Gunns sliding off the continental shelf into the abyss.

The risk is well and truly back in risk capital where it rightfully belongs.

Many will be scorched as the subprime, slick credit and delusional accounting schemes work through the world economy, transforming world money markets into gut-shot dogs in the process. There will be an untold number of victims, deserved and undeserved and there will be a few winners as well.

The people of Tasmania are beginning to look like winners. Merry Christmas.

Bob McMahon
abetteraustralia.com