glenn stevens : recent developments address by mr glenn stevens, governor of the reserve bank of australia, to western sydney business connection, sydney, 9 june 2010. * * * thank you for the invitation to be here today in western sydney, a region which accounts for about one in every 15 people employed in australia. of course events far from western sydney can affect all of us here, through various channels. in view of the developments in recent weeks in europe, it seems sensible to devote some time to what has occurred, and to what it may mean for europe itself, for the global economy and of course for australia. i should stress at the outset though that any assessment is very much preliminary at this stage. to begin, let me sketch some background on the global economy. we estimate that world gdp grew by around 1 per cent, or perhaps a little more, in the march quarter of this year. this was the third consecutive quarter of growth of about that pace after the contraction in the first half of 2009. note that this occurred with very little contribution from the euro area, a region in which domestic demand contracted over the past two quarters. many respectable forecasters have pencilled in a growth rate for 2010 as a whole of 4 per cent or a bit more – that is, they have expected that the sort of the growth already seen for the past nine months or so would continue for the rest of this year. this would be close to, or slightly above, the average pace of growth for the global economy over the ten years up to 2008. this is not just the reserve bank ’ s forecast – though we broadly concur with it at this stage. the imf, the oecd and various private forecasters have numbers like this. there are some who are more pessimistic, though there have also been others somewhat more optimistic. it is worth noting, by the way, that this outcome would be noticeably better than what was expected a year ago. for most of the intervening period the bulk of commentators seem to have been worried by “ downside risks ” – that is the possibility that things could turn out worse than expected. but it was the “ upside ” risks that, in fact, materialised over that period. one reason for that may be that all countries responded to the events of late 2008 by moving their macroeconomic policies in an expansionary direction. just as the downturn in october 2008 was highly synchronised, so was the policy reaction. in

lack of lenders, such as, mutual funds and insurance companies in repo market, etc. reserve bank is engaging with other regulators to address these issues. while sebi has permitted the mutual funds to participate in this repo market, authorisation from irda is expected soon. there is a view that an exchange traded tripartite repo structure could enhance attractiveness of corporate bonds and improve trading volumes. there are, however, concerns, among others, relating to the capacity of central counterparty ( ccp ) to handle the risk, particularly given the low level of liquidity in the underlying cash market and liquidity accessing capacity of the ccp under extreme situations when settlement obligations have to be met in an orderly manner. the efficacy of these instruments ( cds, irf and repo ) hinges around the crucial issue of whether market participants would use the instrument to hedge risks or they remain as available instruments not used. though all these instruments were introduced after having detailed consultation with the market participants, it is rather perplexing for regulator to find almost no activity in these instruments. it is hence necessary that the market participants make best use of the product. credit enhancement – bank guarantee other issue which market has been demanding is allowing banks to provide credit enhancement / partial credit enhancement to corporate bonds by means of guarantee, credit facility, liquidity facility, etc. the measure may appear to be expedient but the underlying objective of de - risking the bank balance sheets through development of corporate debt market will not be met as such a product will place the entire risk on the banking system. further, banks providing credit enhancements / partial credit enhancement like issuing guarantees for corporate bonds will distort the pricing of the corporate bonds, discourage bis central bankers ’ speeches institutional and retail investors to appraise and assume credit risk and add to the reputational and financial risk of banks. further, if guarantees are offered by public sector banks, investors tend to form an impression that the bonds have implicit government support. thus, provision of bank guarantee will impinge on the genuine development of corporate bond market. in fact there is hardly any parallel in the world of credit enhancements being provided by the banking sector to corporate bonds. in this regard, some structure for partial credit enhancement, outside banking, could, however, be considered. under the extant regulations of the foreign exchange management act ( fema ), entities like multi - lateral / regional financial institutions, government and financial institutions, foreign equity holders, etc