The facts and figures of Rudd’s move to shore up the economy.

  • Deposit guarantee: Unlimited guarantee of all deposits in Australian banks, building societies and credit unions and Australian subsidiaries of foreign-owned banks for three years. (Click here for a full list those institutions.) According to the PM:

The guarantee applies to all types of deposits, regardless of the type of account through which the deposit is made. For example, it includes savings accounts, passbook accounts, cheque accounts, pensioner deeming accounts, term deposits, mortgage offset-accounts, farm management accounts, first home savers accounts and retirement savings accounts. Both retail and wholesale deposits are covered by the guarantee.

  • Guarantee of term funding for institutions: Guarantee of wholesale term funding of Australian incorporated banks and other authorised deposit-taking institutions. According to the PM, this will “enable Australian institutions to raise funds overseas in the current tight conditions and will restore confidence in credit markets.” The PM said:

The guarantee on wholesale borrowing will be made available to Australian-owned banks, Australian subsidiaries of foreign-owned banks, building societies, and credit unions. It will be available, on application, for new and existing term debt issuance out to 5 years (60 months). The guarantee will be available for eligible debt instruments issued in all major currencies.The guarantee will not be available to foreign banks, including those with branches in Australia, or entities that are not APRA-authorised deposit-taking institutions. These latter entities are not subject to Australia’s prudential regulation regime.

  • Purchase of mortgage backed securities: The Australian Office of Financial Management has been directed to purchase an additional $4 billion in residential mortgage backed securities from merchant banks, general financiers, credit union, pastoral finance companies. This is the second purchase of that size, the first coming on 26 September.

The moves follow action taken by European governments over the weekend.

  • Leaders of the 15 nations which use the Euro agreed to inject funds into the stricken banks to return some confidence to the finance sector
  • The agreement did not establish a “European fund”, rather each nation committed to providing an uncapped amount to its own banks
  • At an individual level, Britain announced 150 billion pounds in government funds and other measures would be available. Germany is planning to make available 50 to 100 billion euros. France has flagged a figure of around 100 billion euros to help with liquidity problems of its banks and insurers. Norway pledged 58 billion euros.

What the pundits are saying:

Really welcome moves. The Federal government has gone further than anyone expected and guaranteed all deposits for three years while injecting another $4 billion into the RMBS market. As I discussed earlier today, this is a very sensible move in the current crisis and should go a long way towards controlling fear and panic outbreaks. It is rare that a government does something that literally allows one to sleep better at night. — Joshua Gans, economics.com.au

Now we’re getting somewhere. As the Times says, no-one knows how much toxic sludge will turn up when the government finally gets access to the books, but it seems unlikely that most governments will be overwhelmed in the way that Iceland has been. The capacity of developed-country governments to raise additional revenue is huge, easily enough to cover trillions in bad debt over a few years. So, once the sector is nationalised it should be possible to get lending flowing again. And, the prospects for an orderly shutdown of the massively overgrown markets for derivatives like credit default swaps suddenly seem a lot better. — John Quiggin

No guarantees on bank funding. It is all very well for the Australian government to announce that it will guarantee the repayment of deposits and also the offshore term funding liabilities of banks, as the Prime Minister, Kevin Rudd, did yesterday. It’s another thing for banks to actually source the funding, especially offshore funding, in the first place. Judging by the interest rates on interbank markets, offshore bank funding remains in chronically short supply. Nor does funding appear to be that much more readily available in recent days to banks in European countries (such as Ireland) that have enjoyed such guarantees for a week or longer. Government guarantees on most bank liabilities look like being a standard part of all governments’ intervention to address the still escalating credit shock that took root in mid 2007 and continues to rattle the stability of financial systems worldwide. — The Sheet

Fine tuning the guarantees. In a crisis, introducing broad guarantees may be a sensible strategy, if the government is assured of several things. The first is that in the absence of a run by depositors or an investor boycott of bank debt, the banks are solvent, sound and secure. The second is that an imminent run threatens the solvency of the banks. Then, if a guarantee prevents the run or solves the boycott (as it should), the issuance of a guarantee has no direct monetary consequences for the government. Even in those circumstances, however, there are good and bad guarantee policy approaches to choose from. In particular, guaranteeing outstanding bank debt is poor policy. Guaranteeing new issues of bank debt, for a fee, may be good policy. — Kevin Davis, Business Spectator

Nationalising banks or boosting their liquidity & restoring trust. My presumption is that this is primarily directed at stopping runs on small non-bank lenders in Australia should there be a “rush to quality”. Of course for the moral hazard reasons mentioned by Buiter this should — at best — be a short-term measure. It has the negative feature of drawing attention to the fact that deposits are not in fact guaranteed — many Australians do not know this — and raises explicitly the prospect that perhaps these institutions are threatened. — Harry Clarke

Peter Fray

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