View Full Version : Forget the $70,000....where did the $4 billion go?!??!
Shinboners
6 Mar 2002, 20:03
Hey Peter, we won't forget....it's our money. :mad:
Dr AlfAndrews
7 Mar 2002, 01:46
Peter should go and see his brother, Tim, for some spiritual help with his gambling problem.
London Dave
7 Mar 2002, 03:45
Let's not forget, this is by the self proclaimed 'sound economic managers' as well. Incompetents. How much further will they raise taxes to pay for this screw up?
hey i missed this scandal, can someone inform me of what supposedly happened?
Well nobody has actually lost anything. It is an accountancy loss based upon a calculation of debt in Australian dollars at a foreign exchange rate on a certain day. If the debt was converted totally into US Dollars then it would show a huge gain!!!
As the debt is long term the real value of gain or loss will only show if and when the debt is retired and the forex movement at that time will be crystallised as a real loss/gain. Whilst the A$ is low, though, you can guarantee that A$ dollar debt will be paid off before US$ but in any case as GDP grows debt tends to follow so it will always tend to remain a paperwork excercise with no real cost.
Originally posted by Theoden
Well nobody has actually lost anything.
Yeah right, and I haven't lost anything on my Pasminco shares either. $4 billion has been lost...it might be regained again, if things change, but it might not.
Originally posted by Theoden
Whilst the A$ is low, though, you can guarantee that A$ dollar debt will be paid off before US$ but in any case as GDP grows debt tends to follow so it will always tend to remain a paperwork excercise with no real cost.
Can you explain that a bit further? How is it a paperwork exercise?
Bloodstained Angel
7 Mar 2002, 11:26
not wanting to defend Costello or Treasury here but these losses are calculated and unrealised.
Once the bill really does come in (in 6 years time) then we can start pointing the finger.
By then it will probably be the ALPs problem anyway, which is kinda poetic because it was them that set the scheme up in the first place
cheers
Originally posted by Theoden
Well nobody has actually lost anything. It is an accountancy loss based upon a calculation of debt in Australian dollars at a foreign exchange rate on a certain day. If the debt was converted totally into US Dollars then it would show a huge gain!!!
As the debt is long term the real value of gain or loss will only show if and when the debt is retired and the forex movement at that time will be crystallised as a real loss/gain. Whilst the A$ is low, though, you can guarantee that A$ dollar debt will be paid off before US$ but in any case as GDP grows debt tends to follow so it will always tend to remain a paperwork excercise with no real cost.
I'm no expert so please explain why in the Courier mail of 1/3/02 that the Institute of Chartered Acoountants said that removing the currency losses from the budget was as shonky as the book-keeping practices of Enron and HIH?
Pessimistic
7 Mar 2002, 12:52
Just reinforces that the policy for ministers is not to listen to ministries or for the ministries not to talk to them.
Dr AlfAndrews
7 Mar 2002, 12:58
Of course the money hasn't been "lost".
Every punter knows that you can always get square on the last race.
Ain't that right, Cossie?
Originally posted by Bloodstained Angel
not wanting to defend Costello or Treasury here but these losses are calculated and unrealised.
Once the bill really does come in (in 6 years time) then we can start pointing the finger.
By then it will probably be the ALPs problem anyway, which is kinda poetic because it was them that set the scheme up in the first place
cheers
2 points BSA
1. If your superannuation fund did this with your money, would you be happy if they said 'It's unrealised. We might get the money by the time you retire'?
2. The ALP may have set it up but Costello has done nothing about it for 6 years, except for removing the automatic stabilisers and so increasing the exposure. Specifically, he rejected a committee report which unanimously recommended abandoning it when the losses were half what they are now.
Up til now I have been a lukewarm Costello fan. This however is unbelievable stuff IMHO.
Shinboners
7 Mar 2002, 13:21
On my reading of it, the likes of Pasminco, MIM, WMC, and a few gold companies also made "paper losses" on currency exchange contracts. It seems to me that the Treasury has fallen into the same trap as these resource companies.
I have a fairly warm attitude to Costello, but after letting the ATO run rampant on the GST and now this stuff up with the currency hedges, I'd like to think that he'd do the honourable thing and resign. Of course, we all know he won't...... :mad:
Okay, this is a simplified version of how it works.
Say we borrow A$300Gillion at 5% pa and US$30Gillion at 3% pa. When the US30Gillion was borroed the forex rate was 60c. That means a total borrowing of A$300G + A$50G= A$350G debt.
With the forex rate now at 50c a revaluation would make A$300G + A$60G = A$360G debt, arguably a A$10G unrealised loss.
Annual interest repayments (debt servicing) would be $15G + $1.8G = A$16.8G. This is a real expense. If none of the debt was in US$ then the servicing cost would be A$17.5G. So in effect the servicing cost is reduced by the hedge despite the $10G increase in capital borrowing when translated into Australian Dollars.
The capital repayment can be deferred almost ad infinitum but If the Australian dollar was to reach say 75c in ten years time and the governments had funds to retire the US$ debt (they could borrow elsewhere in A$ to do this) a real gain of A$10G would be realised by the government of the day, who would no doubt claim all the credit for being such good economical managers.
Hedging commodities is not the same thing.
Originally posted by 1AD
I'm no expert so please explain why in the Courier mail of 1/3/02 that the Institute of Chartered Acoountants said that removing the currency losses from the budget was as shonky as the book-keeping practices of Enron and HIH?
If it were a public company the unrealised loss would most likeley have to be contained in the 'notes' to accounts rather than the balance sheet.
I'm not sure that the government is tied by the corporations act so the budget reporting would have it's own rules laid down and probably legislated.
Originally posted by Bloodstained Angel
By then it will probably be the ALPs problem anyway, which is kinda poetic because it was them that set the scheme up in the first place
cheers
Of course it was Labor's fault as "the minister for silly smirks" pointed out the other night when he was trying weasel his way out of it. The problem with that is The Libs have had 6 years to correct it and haven't and also the scheme first started to lose money in 1997 when the Liberal party was in power!
Originally posted by Bee
Of course it was Labor's fault as "the minister for silly smirks" pointed out the other night when he was trying weasel his way out of it. The problem with that is The Libs have had 6 years to correct it and haven't and also the scheme first started to lose money in 1997 when the Liberal party was in power!
Quite correct. With interest rates at around 14% the A$ was very popular with overseas investors and it was very strong. Once interest rates dropped, so did the currency value.
But the question is "Do you want to go back to high interest rates so we can have a strong dollar?"
Given the resultant flood of cheaper imports and reduced exports as we become uncompertitive and martgage rates going so high people can't pay I suspect that most would prefer what we have got.
But Theoden aren't interest rates on the rise now?
Shinboners
7 Mar 2002, 21:06
Originally posted by Theoden
Hedging commodities is not the same thing.
From my understanding, the mining companies did not do a direct hegde on the price of their commodities. Rather, they locked in the value of the Australian dollar (for companies like WMC and MIM, the Aussie dollar was something like $AUS 1.00 = $US 0.70) in the expectation that the Australian dollar would rise. However, the Australian dollar dropped in relation to the US dollar, and hence, they had to take losses on the hedge.
The Treasury were also doing a hedge. While the mining companies were trying to protect the prices they got for their commodities, the Treasury were trying to protect the value of the debt they had to repay. Essentially, they were doing the same thing and in both cases, they took an unacceptable risk.
Shinboners
7 Mar 2002, 21:09
Originally posted by Bee
Of course it was Labor's fault as "the minister for silly smirks" pointed out the other night when he was trying weasel his way out of it. The problem with that is The Libs have had 6 years to correct it and haven't and also the scheme first started to lose money in 1997 when the Liberal party was in power!
And I will wash my mouth after this, but I agree with Bee here. I can give a minister enough slack to make one major mistake, and as far as I'm concerned, Costello had his with letting the ATO have its way on everything when it came to the GST. So, here is his second major mistake, and he has to take the blame for it.
There is no use blaming the ALP. It was up to Costello to change the policy and he didn't. And he can't claim, "I didn't know - the department didn't tell me". If there is any policy with the potential to affect the budget by $4 billion, then it is Costello's job to know about it.
Shinboners
7 Mar 2002, 21:13
Originally posted by Theoden
Quite correct. With interest rates at around 14% the A$ was very popular with overseas investors and it was very strong. Once interest rates dropped, so did the currency value.
I think it's a bit simplistic to blame the drop in the value of the Australian dollar simply due to interest rates. As we've seen in the last twelve months, US interest rates have dropped at a faster rate than Australian interest rates, so therefore, the Australian dollar should have risen in value compared to the US dollar.
There are several other issues at work (for instance, Australia being perceived as a commodities based economy, we're not regarded as a hi-tech nation), so the interest rate working in tandem with the value of the Australian dollar doesn't seem to hold these days.
Perhaps someone gave him the wrong set of photographs, Shins!;) :p
Shinboners
7 Mar 2002, 21:22
Originally posted by Bee
Perhaps someone gave him the wrong set of photographs, Shins!;) :p
Having spent this evening with a bottle of red and the company of a friend who is not only a paid up member of the ALP, but who also works for a union....and to top it all off, we watched a DVD of "Yes Minister"....I'm almost willing to believe anything. :eek: :p
Goldenblue
8 Mar 2002, 08:47
Its simple to blame the opposition whoever is in power. It's a politicians basic right to blame all around him but himself and that goes for both sides.
He had 6 years to fix it. He had his eye on the exchange rates, interest rates as well as other aspects of the economy.
When the Libs got into power the dollar was about 73c compared to the US dollar, now its 50c. He saw the dollar fall since they came to power, so he had ample time to pull out or disband the whole scheme.
Forget it Libs, this is your fault, not Labors.
Why do pollies open their mouths and expect us to believe thier lies? Sick of being treated as an idiot by these bastards.
Originally posted by Theoden
If it were a public company the unrealised loss would most likeley have to be contained in the 'notes' to accounts rather than the balance sheet.
I know hedging is not the same as investing but if it was say a share portfolio surely an unrealised loss would go on the balance sheet? Why is this different?
Originally posted by Theoden
Okay, this is a simplified version of how it works.
Say we borrow A$300Gillion at 5% pa and US$30Gillion at 3% pa. When the US30Gillion was borroed the forex rate was 60c. That means a total borrowing of A$300G + A$50G= A$350G debt.
With the forex rate now at 50c a revaluation would make A$300G + A$60G = A$360G debt, arguably a A$10G unrealised loss.
Annual interest repayments (debt servicing) would be $15G + $1.8G = A$16.8G. This is a real expense. If none of the debt was in US$ then the servicing cost would be A$17.5G. So in effect the servicing cost is reduced by the hedge despite the $10G increase in capital borrowing when translated into Australian Dollars.
The capital repayment can be deferred almost ad infinitum but If the Australian dollar was to reach say 75c in ten years time and the governments had funds to retire the US$ debt (they could borrow elsewhere in A$ to do this) a real gain of A$10G would be realised by the government of the day, who would no doubt claim all the credit for being such good economical managers.
Hedging commodities is not the same thing.
Thanks for the explanation:)
Bloodstained Angel
8 Mar 2002, 11:46
sorry Shinners and Bee
I wasn't trying to pin the blame on the ALP for this, I was pointing out that it was the previous ALP administration that first introduced the scheme.
The present mob should be damned for not pulling the plug on it in 97 when it stopped making money for Treasury (something like 100 mill a year up to then, quite a tidy little earner actually)
and of course the current huge debts are all the responsibility of the Smirking One
cheers
Shinboners
8 Mar 2002, 12:36
Not a problem BSA.
If the ALP had won the last election, I'm not sure whether I would have blamed them because they would've only been in power for a few months. But give them a year in power and I would blame whoever they had as Treasurer as much as I'm blaming Costello now.
Sure, the Australian dollar might go back up to a level where the Treasury finishes in front, but the key issue is whether the risk was an acceptable one to take. From my understanding of it, the risk was unreasonable.
Leave the (attempts to make a profit from) hedging of currencies to the hedge funds where they are playing with the money of people who are prepared to take on the risks involved.
You are failing to understand that a loss is almost an impossibility. It could only happen if the A$ remained below the striking vale of the deal for eternity. That is say 60c. The debt can be continued ad infinitum and only crystallised once the A$ is over the inintial strike value thus making a profit. I cannot see anything but good coming from the policy and despite his leadership failures it shows that Keating was a shrewd treasurer.
Shinboners
9 Mar 2002, 21:07
Originally posted by Theoden
You are failing to understand that a loss is almost an impossibility.
So, the cumulative losses of $2 billion up to June 30, 2001 is the figment of the imagination of the Audit Office?
It could only happen if the A$ remained below the striking vale of the deal for eternity. That is say 60c.
These deals were struck when the $AUS 1.00 = $US 0.65 to $US 0.85. Since the floating of the Australian dollar under Keating, the currency has been in a state of decline. There is no indication that it will return to the $US 0.65 or greater in the short to medium term and for any sustained length of time.
The debt can be continued ad infinitum and only crystallised once the A$ is over the inintial strike value thus making a profit.
You've ignored that interest payments must be paid on debt. If someone is carrying debt in $US and the value of the $AUS declines in relation to the $US, then more $AUS must be paid to cover the interest and capital...ie, the debt is more expensive to service.
I cannot see anything but good coming from the policy and despite his leadership failures it shows that Keating was a shrewd treasurer.
Perhaps you should pick up a copy of this weekend's Australian Financial Review and read Brian Toohey's article on the Treasury's antics.
Theoden
10 Mar 2002, 11:01
Originally posted by Shinboners
So, the cumulative losses of $2 billion up to June 30, 2001 is the figment of the imagination of the Audit Office?
It is an unrealised loss. Like an unrealised punch on the nose it hasn't happenned yet!
These deals were struck when the $AUS 1.00 = $US 0.65 to $US 0.85. Since the floating of the Australian dollar under Keating, the currency has been in a state of decline. There is no indication that it will return to the $US 0.65 or greater in the short to medium term and for any sustained length of time.
I did say that ' A loss could only happen if the A$ remained below the striking vale of the deal for eternity'. It does not matter what length of time it is sustained for or if it is short, medium or long term. Once the A$ is over the strike value a profit is made. Although the A$ is undervalued against a basket of currencies so the US$ is hugeley overvalued. In time this is likeley to be redressed.
You've ignored that interest payments must be paid on debt. If someone is carrying debt in $US and the value of the $AUS declines in relation to the $US, then more $AUS must be paid to cover the interest and capital...ie, the debt is more expensive to service.
Quite the contrary, look at my explanation and you will see that I have considered servicing costs fully. In fact lower interest rates were the main reason for the hedge and I showed that it actually 'saved' money.
Perhaps you should pick up a copy of this weekend's Australian Financial Review and read Brian Toohey's article on the Treasury's antics.
Perhaps I should, but political sabre rattling by the media in order to sell newspapers tends to be misleading.
Hey, the A$ is over 57c so that means that the $4b loss is now a paper profit. Wow, and if the dollar goes to 65c it will be a 4b gain. Perhaps Costello should include it in the budget papers like labour asked him to do. What a great financial wizard he must be to those that criticised him on this thread.
(For the rest of us we just accept that it was labour political bunkum)
Captain Sensible
10 Jun 2002, 12:08
Originally posted by Frodo
Hey, the A$ is over 57c so that means that the $4b loss is now a paper profit. Wow, and if the dollar goes to 65c it will be a 4b gain. Perhaps Costello should include it in the budget papers like labour asked him to do. What a great financial wizard he must be to those that criticised him on this thread.
(For the rest of us we just accept that it was labour political bunkum)
:rolleyes:
Why turn this into a blinkered political exercise Frodo?
Those of us from the other side of politics havent.
Is this the extent of your understanding of situations like this, that you just blame it on 'Labour(sic) political bunkum'? You might be happy to accept that, the rest of us want to get to the bottom of the situation.
Shinboners
10 Jun 2002, 14:48
Originally posted by Frodo
Hey, the A$ is over 57c so that means that the $4b loss is now a paper profit. Wow, and if the dollar goes to 65c it will be a 4b gain. Perhaps Costello should include it in the budget papers like labour asked him to do. What a great financial wizard he must be to those that criticised him on this thread.
A financial wizard or just plain lucky? Anyway, I still stand by my main complaint that the risk of using such a currency hedge strategy is unacceptable.
(For the rest of us we just accept that it was labour political bunkum)
Labor political bunkum is a tautology. :p