State Debt

Adjourned debate on motion of Hon. R.I. Lucas:

That this council notes the level of total state debt in South Australia since the early 1990s and the factors that have influenced that level of state debt.

(Continued from 17 May 2017.)

The Hon. R.I. LUCAS (17:57): I rise to conclude my remarks in relation to this issue. When I concluded, I was about to address the detail of the issue in relation to interest rate manipulation in the period leading up to the state election of 1989. I refer to the final report of the Royal Commission into the State Bank of South Australia. On page 290, I refer to the following comments:

As shown in earlier chapters, the issue arose in the context of a State election in 1985, and a federal election in 1987, when the Treasurer's information and advice led the Bank to defer any change to home-loan interest rates until after the elections.

A State election was again due towards the end of 1989, or at latest in early 1990. It was in fact held on 25 November 1989.

At the six-weekly meeting on 16 May 1989 the Bank, in the report routinely provided for such meetings, commented that interest rates were likely to stay high until December and might well rise by 0.5% before December. That prompted the Treasurer to remark that such a move would be 'very bad in the December quarter'. It is difficult to identify any factor other than the prospect of an election during that period, which could have prompted the remark. Mr Prowse understood that the Treasurer was seeking to discourage an interest rate rise in the December quarter.

A passing reference to the topic in the Bank's routine report for the six-weekly meeting of 28 August 1989 again excited attention. The Treasurer was then told that the Bank was borrowing money to fund housing loans at rates above its housing lending rate, and that the position would not improve until after December 1989. Again, the Treasurer expressed concern at the prospect of an increase in home-loan interest rates.

On 15 September 1989 Mr Clark—

that is Mr Marcus Clark—

wrote to the Treasurer at the Board's direction advising him that continuing high interest rates were having an adverse impact on the profitability of the Bank, especially as the Bank was now having to borrow at 18.5% and lending for housing in South Australia at between 16.25% and 16.5%. The letter indicated that, at the current lending rate of $50 million per month, the loss on housing loans was increasing at the rate of $12 million per year, so that the Bank would soon be forced to increase its rates to 17% in line with other banks. The letter concluded that the Bank did not believe it could continue to subsidise home loans at a level of loss which would dramatically affect the Bank's profitability.

I interpose to reinforce the nature of that part of the commissioner's report. It is saying that treasurer Bannon was placing pressure on the bank in that period from May through to September. There was an election on 25 November. On 15 September, he was told that the bank was lending at 16.25 and 16.5 per cent and was actually having to borrow money at 18.5 per cent. It was undercutting its lending rates to the extent of almost half to three-quarters of a per cent at that particular time. The treasurer was being told that the bank was making very significant losses as a result of the decisions that they were taking and that the treasurer was urging them to take. I return to the report:

The Treasurer's response, almost certainly prompted by the letter, was to have his Economic Adviser, Mr Woodland, speak to Mr Simmons on 22 September 1989 and again on 25 September 1989 to express the Government's concern, and to endeavour to have Mr Simmons speak directly to the Treasurer on the topic. It is noteworthy that Mr Woodland spoke to the Chairman, Mr Simmons, rather than to Mr Clark who was the author of the letter and the appropriate person to speak for the Bank on such matters.

In the face of an accumulating trading loss of some $12 million per year on such business, there was no legitimate commercial reason to challenge what Mr Clark had said. The Bank, which was expected to be competitive, was shouldering the burden of additional unprofitable assets at the rate of $50 million per month or $600 million per year.

The advice was that there were unprofitable assets of $600 million per year as a result of the policy that the treasurer in the Labor government was urging upon the State Bank. Continuing:

Section 15 neither provides nor implies any mandate or authority for such a policy: quite the reverse. The other major banks, which were charging more realistic rates, would shrug with surprised content in observing the plight of their competitor.

Further on, the report says:

On 26 September 1989 the Chairman and Mr Clark met the Treasurer for a routine six-weekly meeting. The topic of interest rates was on the agenda. There is a range of emphases among those present at the meeting about how the topic was discussed, but it is clear on all accounts that Mr Clark vigorously stressed the need for the Bank to raise its interest rates—

this was about three months before the state election—

if it was to act commercially, and that it had to act commercially. It is also clear that the Treasurer requested the Bank to hold down its housing-loan interest rates for a time, consistent with the comment he had made at the meeting on 9 May 1989. It is a fair conclusion on the whole of the evidence that this made Mr Clark angry, and that indeed may be an understatement.

There are only two issues in real contention about what transpired at the meeting: the extent to which, if at all, the Treasurer's comments were made with some explicit reference to the anticipated election or to political sensitivities, and the extent to which, if at all, compensation was offered to the Bank to hold down its interest rates.

Mr Simmons said that he was told by the Treasurer at the meeting that an interest rate rise would be politically undesirable—

This is the chairman of the bank saying, at the meeting, that treasurer and premier Bannon was pressuring the bank, even in light of the fact that they were losing money hand over fist during that particular period, to say that an interest rate rise was politically undesirable for the Labor government of the day—

and that he (the Treasurer) would like the Bank to hold its rates 'for a couple of months'—

he clearly had the election in mind, which was on 25 November 1989—

that he (Mr Simmons) was responsive to the request despite Mr Clark's attitude, and that he told the Treasurer he would take the request to the Board. Mr Bannon in evidence did not agree that he had used such words, or that their import should be attributed to him and he specifically denied that he had commented about the forthcoming election at all. He said that he had not then fixed the date of the election, which could still have been held in the first quarter of 1990. Mr Simmons' clear recollection was that the possibility of compensation was also adverted to at that meeting and Mr Clark confirmed Mr Simmons' recollection on this aspect, but Mr Bannon did not recall the issue of compensation being raised. Mr Woodland, however, did recall the issue of compensation—

I interpose here: Mr Woodland was actually Mr Bannon's economic adviser, his own staffer—

arising this time prior to the Reserve Bank's announcement of a subsidy for the nationally operating banks, made on 28 September 1989, and he described the meeting as being an 'argument' about whether the Bank should put up rates at that time. He did not recall the election being mentioned, although it was of concern to him and he knew it was of concern to the Treasurer.

Further on:

At the Board meeting on 28 September 1989, the Board decided to freeze housing-loan interest rates for a time which ultimately was to 31 December 1989…

Conveniently, one month after the state election in November 1989. Without quoting all of the minutes, the section of the minutes states:

It was agreed that the Group Managing Director should again contact the Premier and advise that where any two major banks, being ANZ and NAB, Westpac and Commonwealth, were to increase their rates, then State Bank would also increase its rates. The Bank would, however consider deferring any increases pending satisfactory arrangements with the Treasury and on the basis that an appropriate proposal be in place by 10 October 1989…

Clearly, that is a reference to the issue of compensation being paid by the government to the bank to keep their interest rates down at least until after the state election in November 1989. Further on in the report the commissioner says:

On 2 October 1989—

so this is now about seven weeks before the election—

Mr Clark met with the Treasurer and Mr Woodland to discuss the possibility of the Bank receiving the suggested subsidy to compensate it for revenue that would be forgone by holding interest rates at their existing level. By then there was little risk of the major banks needing to increase their lending interest rates, which were now 'cushioned' by the Reserve Bank's decision.

The Treasurer agreed in principle to the Bank's proposal and refer the matter to Treasury to negotiate a solution.

On 26 October 1989—

about four weeks before the election—

the board considered a paper dated 20 October 1989 presented by Mr Clark, headed 'Profit 1989/90 Year'. The paper, in discussing the fact that Bank was operating below budgets, specifically stated that one factor affecting the bank's profitability was its inability to cover the cost of funds borrowed to provide 'below margin' housing loans. It noted that the Bank's failure to increase interest rates on home lending was founded upon the Bank's mandate to provide affordable housing to South Australians and political sensitivities approaching an election...

So, this is actually in a board paper and it is referring to the fact that the reason they were going on losing money in terms of their lending practices was because of political sensitivities approaching an election. He continues:

On 31 October 1989 Mr Clark met with Mr Prowse and discussed, among other things, the quantification of the subsidy for not increasing housing interest rates. The timing of this meeting was important as Mr Clark, implementing the Board's decision, was conscious of the need to have some arrangement confirmed with Treasury prior to the election on 25 November 1989. His note of the meeting is quite explicit:

I also explained to Mr Prowse that from the housing loan issue, the Bank is in a very strong position to see this matter resolved in the next few weeks, but has no bargaining power once the election is over.

The bank is making it quite clear that it is looking for a secret payment from the government in the period leading up to the election to help the government out by keeping interest rates low, or lower, during the election of 1989, but that they knew they only had leverage whilst it was a period leading up to the election and they needed this deal to be sorted out before the election was held because their bargaining power would be gone once the election was held. He continues:

Shortly thereafter, an arrangement was made for the bank to receive $2 million as compensation.

On 13 December 1989—

soon after the election—

the Board considered a paper presented by Mr Paddison dated 11 December 1989 upon which it resolved—

surprise, surprise—

to increase interest rates from 16.5% to 17% effective from the 1 January 1990. The paper contained the following assertions:

This matter was discussed at the Board meeting of 28^th September 1989. As a result of that discussion and given the sensitivity of the issue in the context of the then forthcoming State Election, it was agreed not to increase interest rates at that time…

With the State Election now completed it is appropriate for the Bank to reconsider its housing rate. We have held our rates at 16.5% for approximately five months longer than our major National Operating Bank competitors. This is causing us to forego approximately $300,000 of interest per month.

In the current profit environment and with little immediate prospect of a further fall in interest rates, it is considered essential that we achieve market parity immediately. Interest funding costs are not dropping and home loans are currently being written at a marginal loss to the Bank.

So, immediately after the election of 25 November, or two or three weeks after the election, the board, on 13 December, votes to increase interest rates and in the board paper and the minutes notes that they had held the interest rate increases down as a result of the forthcoming state election and political sensitivities at the time. The royal commissioner's findings continue:

Mr Simmons agreed that these assertions were correct, and although the minutes cannot of themselves be held to bind Mr Bannon to the Bank's version of the events, there is ample support in the evidence of the contemporaneous events for the substantial accuracy of the minutes.

It is plain from the above that, whether or not the election had been announced, Mr Simmons and Mr Clark and the Board all understood that the Treasurer's comments at the meeting of 26 September 1989 were in the context of an imminent election, and that their understanding was shared by Mr Bannon's advisers.

The evidence does not warrant an affirmative finding that Mr Bannon himself made a proposal at this meeting in terms of a categorical request for political favours. But he knew that the proposal to hold interest rates involved the Bank acting to its financial detriment in a way which would avoid political odium and might well attract support to his Government; and he could not have failed to realise the Bank Board was alive to that implication. The intense interest of his Economic Adviser, Mr Woodland, supports that view, and Mr Emery's specific recollection that the political implications were mentioned also tends to confirm that view of the facts. To the extent that differing versions of the conversation are inconsistent with that finding, they simply reflect the different perspectives of the individuals concerned.

In his letter to the Bank of 24 November 1989 Mr Prowse—

this is the day before the election—

in dealing with a range of issues, proposed, for no attributed reason, that $2 million of the Bank's indebtedness to SAFA be forgone. Mr Simmons' letter in reply of 14 December 1989 is equally oblique. Mr Prowse's minutes to the Treasurer of 11 and 19 January 1990 are of parallel obscurity:

Within the wide-ranging discussions on the financial structure of the Bank it was agreed with the Bank—subject of course to your approval—that SAFA would now forgo $2 million of indebtedness, representing a 'remnant of an earlier transaction—[relating to restructuring of housing finance]—the details of which are not significant'.

This is Treasury-speak, which makes no reference, of course, to political sensitivities or anything. They were much more sensitive to the issues that were alive at the time than the State Bank board and the minutes were, clearly. Further on:

Subject to approval by the Treasurer, that was 'our proposed resolution of one outstanding matter'.

The commissioner concludes:

There are two important footnotes to this episode:

There is clear evidence before the Commission that in media statements and electoral advertisements and 'propaganda' prior to the election, it was the Government that claimed credit for holding down interest rates.

The manner in which the compensation to the Bank was agreed and paid can only be described as surreptitious. The Bank itself had stipulated 'no publicity' and the manner in which the payment was made was such as to minimise the risk, whether or not intentional, of public disclosure of the arrangement.

There is much, much more, and time does not permit me to go through all of that detail, but that is the brutal reality of what was going on at the time. I listed last week the examples of the 1985 state election and the 1987 federal election, but the most obscene example of political manipulation of an interest rate issue and responsibility in part for the State Bank collapse are as a result of those comments from the State Bank report.

Put in its most simple and most brutal fashion, we had a situation where interest rates were in the order of 16 per cent, 17 per cent and 18 per cent in the period leading up to the 1989 state election. From May through to November, treasurer Bannon, on behalf of the Labor government, was pressuring the State Bank of South Australia to not increase interest rates because of the political odium that would descend upon the then Labor government.

When the bank resisted that in the early stages, what was arrived at was a secret $2 million payment to the bank for them to keep quiet about it and for them to not increase interest rates in the period leading up to the election, only to increase the interest rates immediately after the election, and for all that period, premier Bannon, the Labor Party and the Labor government at that particular time claimed credit for keeping interest rates low in South Australia. That is the brutal reality of what was going on with the State Bank and the Labor government at the time.

I will not brook any of the attempts to whitewash the history in relation to the Labor Party's responsibility. I have heard some commentators and others saying that it was an independent body, they made these decisions unrelated to the Labor government administration, it just happened to be unlucky that the Labor Party was there at that time. We have all heard those stories in justification, attempting to whitewash the circumstances of the State Bank debacle in South Australia.

The brutal reality is that the dirty hands of the Labor Party and the Labor government were all over the State Bank in relation to these interest rate issues. The brutal reality was that the premier at the time, the treasurer at the time, senior advisers at the time and the cabinet at the time were actively engaged in trying to manipulate interest rates in the period leading up to the 1989 election, at the financial cost of the State Bank of South Australia, for the political benefit of the Labor government. The reality is that in today's climate such a circumstance would have ended up in front of an ICAC. An ICAC, of course, did not exist in those days.

As I said at the time, the issue of ministerial accountability is now being rewritten by Premier Weatherill, minister Snelling, minister Vlahos and others in refusing to accept responsibility in relation to Oakden and issues like that. In this case, the responsibility rested with the Labor government. Ultimately, because it became untenable, premier Bannon did resign his position and hand over to incoming premier Arnold. It was only when, eventually, it became too much that it was impossible for him to continue.

With the first announcement of the State Bank bailout, premier Bannon said he would fight on and continue to fight the battle on behalf of the government but, ultimately, the evidence was too overwhelming and he did accept responsibility and resign his position. At least to that extent he can be contrasted to the position of Premier Weatherill, minister Vlahos, minister Snelling and others in the current environment.

As I said at the outset, it has been many years since the State Bank. I have seen people and heard people trying to rewrite history. There are many members of this parliament who perhaps were not active, some perhaps not even born, at the time of the debacle of 1989, leading through to 1993. I want to place on the record for those new members, newer members and those to be elected in 2018, the sad and sorry history of this Labor government. That was the previous one; on other occasions and in other motions we can document the obscenities and atrocities committed by the current Labor government under Premier Weatherill.

Debate adjourned on motion of Hon. T.J. Stephens.