Clarity key to handling sub-prime

The Governor of the Reserve Bank, Glenn Stevens, has made a call for clarity on the level of exposure of Australian companies to the sub-prime market meltdown, arguing that transparency is a fundamental prerequisite for appropriately handling the situation.

Addressing a Sydney luncheon this week, Stevens said that the biggest problem noted by the Reserve Bank was not that the exposures to the sub-prime meltdown were large, but that they were not transparent.

“The sooner they are all on the table, the sooner uncertainty will be lessened and the sooner market participants can discriminate sensibly among their counterparts,” he said.

“This is not easy to achieve given the pricing issues, but at the moment there is widespread suspicion in the absence of clear information,” Stevens said.

He said it would be very damaging for the lack of information to lead to a lengthy period of severely reduced credit flow to perfectly good borrowers simply because investors could not choose who was sound and who was not.

“More information is needed,” Stevens said.

Looking specifically at liquidity within Australia, the Reserve Bank Governor said that the system was amply supplied and that settlement balances were, in fact, much higher than normal.

“The RBA has supplied as much cash as the market requires for the cash rate to remain at the level set by the board, and that rate has indeed remained within a couple of basis points of the target throughout,” he said.

Stevens said that it was possible that Australia might see a further tightening of financial conditions in the months ahead and that, in assessing that prospect, the RBA would need to take note of a number of factors including the domestic economic outlook and that for the US.