Rudd Government issues trillion-dollar guarantee on deposits
Article from: Herald Sun
Gerard McManus
October 13, 2008 09:25am
AUSSIE stocks are poised to judge today whether the PM's $1.2 trillion bank deposits guarantee is enough to stop the share market rout.
Investors will also be nervously awaiting whether the move by European leaders overnight have to safeguard its own banks will also calm markets.
The Australian guarantee affects all bank deposits of any size for the next three years, and has seen an immediate impact on the Australian dollar.
At 7am, the dollar was trading at $US0.6674/82, up from Friday's close of $US0.6591/99.
The Government has also thrown its backing behind Australian overseas bank borrowings.
In the dramatic move last night, Prime Minister Kevin Rudd warned the nation that the economic crisis had reached a "new and dangerous phase".
"Australia is experiencing the economic equivalent of a rolling national security crisis, and the challenges are great," Mr Rudd warned during national television addresses.
"There is going to be a lot of rough weather ahead, and I just want to level with you."
As the International Monetary Fund said the global economy was on the brink of collapse, Mr Rudd announced unprecedented measures to maintain confidence in the Australian banking system.
The move comes as 15 European Union leaders today agreed on a joint strategy to end the haemorrhaging of market confidence by underwriting inter-bank loans and safeguarding financial institutions from collapse.
In other significant financial news, Westpac today announced it would cut the rate on its fixed home loan rates by 1.1 percentage points to 7.19 per cent.
The three measures announced yesterday include:
A COMMONWEALTH government guarantee on the $1.2 trillion worth of deposits in Australia, including all deposits in banks, building societies and credit unions for the next three years.
A GUARANTEE on Australian bank borrowings from overseas.
A FURTHER $4 billion in support to help the country's non-bank lenders compete in the mortgage market.
Mr Rudd said he wanted to put the guarantees in place to ensure that there was not any "unnecessary anxiety".
But he has conceded housing prices could be the latest sector hit by the global financial crisis.
In an interview on the Nine Network's 60 Minutes program last night, Mr Rudd said the economic downturn could hit all parts of the economy, and that included the housing market.
When asked if he expected house prices to fall as a result of the slump, Mr Rudd said: "Well, I don't have detailed information on various parts of the housing market, it's different across various parts of the country".
"But, you know, if the economy is being buffeted abroad, then it follows, from forces abroad, it means that it's going to impact all parts of the Australian economy as well. That's just the truth."
Last night, Opposition Leader Malcolm Turnbull gave an "absolute guarantee" that the Coalition would back the Government's planned measures, but said the Government should postpone plans to introduce a carbon emissions scheme.
On the eve of the resumption today of Federal Parliament, shadow treasurer Julie Bishop also offered the expertise of former Cabinet ministers Joe Hockey, Nick Minchin and Helen Coonan to help the Government during the crisis.
Both the PM and the Treasurer Wayne Swan have also given strong warnings the Government may have to rethink its Budget strategy in the light of expected lower economic growth and higher unemployment.
The guarantee for banks borrowing overseas is designed to ensure Australian banks remained competitive against weaker banks that have already been given some form of sovereign guarantee.
It also sends a message to overseas creditors that their money is safe in Australia.
"I will not stand idly by while Australian banks are disadvantaged in international credit market places because of the actions taken by foreign governments in support of them," Mr Rudd said after announcing the package.
"We must act now because other governments with weaker banks have moved to make those institutions more competitive than our stronger banks."
Mr Rudd said many foreign banks, which were much less well run and poorly regulated than Australian banks, were now guaranteed by their governments, placing local banks at a disadvantage when competing for funding.
The Government had originally planned to legislate for a guarantee on deposits of up to $20,000 while the Opposition had called for a guarantee on deposits up to $100,000.
Mr Turnbull welcomed the measures. "You find that once these guarantees are given, the fact that they are given means that they are very unlikely, even more unlikely, to be called upon," he said.
It is estimated that banks access about 25-30 per cent of the major Australian banks loan funding from overseas -- worth an estimated $400 billion to $500 billion.
Mr Rudd repeated that Australian banks remained financially sound, but said the crisis was affecting confidence across the globe. "Australia is better positioned than practically any other country in the world," he said.
Aussie PM-Trillion dollar guarentee on deposits..
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