AUSTRALIA'S government will guarantee all deposits with institutions for the next three years to bolster confidence in the banking system amid a worsening global financial crisis.
The government will also guarantee all "term wholesale funding" by Australian banks operating in international credit markets to ensure they can compete against global rivals getting similar backing, Prime Minister Kevin Rudd told reporters yesterday in Canberra. Rudd was speaking after a two-day crisis meeting with senior ministers in the Australian capital.
The measures come after the Group of Seven finance chiefs meeting in Washington pledged to take "all necessary steps" to unfreeze credit and money markets, without providing details. The United Kingdom last week agreed to guarantee loans between banks, while Ireland, Greece and Germany are among nations that have pledged to guarantee savers' deposits, Bloomberg News reported.
"It looks as though government guarantees of both inter-bank borrowing and deposits are going to be part of a widespread approach to restoring confidence and getting the inter-bank lending markets going again," said Saul Eslake, chief economist at Australia & New Zealand Banking Group Ltd. The measures announced by Rudd "should be seen as giving people more reason for confidence in the Australian banks," he said.
No free gift
Between A$600 billion (US$386 billion) and A$700 billion of deposits are held in Australia at any one time, Rudd said. The deposit guarantee will be reviewed after three years, he said. The government had previously proposed to guarantee bank deposits of as much as A$20,000 each.
"This global financial crisis has entered a new and dangerous phase, with real consequences for growth, for jobs and therefore the future," Rudd said. "As prime minister of Australia, I will not stand idly by while Australian banks are disadvantaged in international credit marketplaces."
Australia's banks "remain in first-class working order," Rudd said. The measures are required to allow them to continue to provide credit over the long term to the Australian economy, he said. The banks will have to pay for the guarantee on wholesale funding through an insurance premium, so it is not a "free gift" from the government, he said.
The government will also put another A$4 billion into residential mortgage-backed securities to help bolster the Australian home-lending market, in addition to an initial A$4 billion announced last month, Rudd said.
Credit unions and building societies welcomed the government's move to guarantee deposits.
"The government is reassuring Australians that their credit union, building society or bank is a safe haven for their savings," Louise Petschler, chief executive of Abacus-Australian Mutual, an industry group, said in a statement.