While Europe stresses about a potential Greek meltdown and contagion crisis, things are looking pretty good from the perspective of Down Under.
Fresh from its surprise decision to hold interest rates last week, Australia has now said it will withdraw government guarantees of commercial banks’ wholesale funding and large deposits and of state government borrowing.
Australia together with New Zealand moved in October 2008 to guarantee all bank deposits. Canberra went furthest, guaranteeing all term wholesale funding by Australian banks in international markets and doubling its pledge to purchase residential mortgage-backed securities to A$8bn ($5.2bn).
Back then, Australia’s Treasurer Wayne Swan said Australia’s deposit guarantee would last three years and cover the country’s entire deposit base of A$600bn-A$700bn.
But in a fresh signal that things are looking pretty good from Canberra’s perspective, Swan said on Sunday that regulators had advised that the guarantees are no longer needed.
Admittedly, Australia’s move comes as other G20 countries have either removed, or plan to withdraw, similar safety nets rolled out in 2008 as borrowing costs spiraled and as investors’ risk appetite evaporated. It follows the FDIC’s move in the US late last year to end its offer to guarantee bonds issued by banks there.
With credit market conditions easing significantly, Australia’s banks are finding it cheaper and easier to borrow funds without using the government’s fee-based guarantees. In fact over the past few months, about two-thirds of bonds issued by Australian banks were unguaranteed, according to the Reserve Bank of Australia’s quarterly monetary policy statement on Friday.
As the Wall Street Journal reports on Monday, Australia’s states have also successfully raised funds without the guarantee. Queensland state’s financing arm, the Queensland Treasury Corp., last month raised A$4bn (US$3.47bn) – the largest-ever domestic bond offering by an Australian state – despite selling the securities without the federal government guarantee.
The guarantee scheme for large deposits and wholesale funding will end March 31, while the government will close its guarantee of state bonds to new issuance on December 31. Adds the Journal:
The longer withdrawal period relative to the bank guarantees is needed for states to establish liquidity in new unguaranteed bond lines, the government said. Existing guaranteed bonds will continue to be covered until either they mature or are bought back and extinguished by the issuer.
Is this the right time for such a move, though? Australia’s four largest banks are among relatively few in the world to retain healthy credit ratings, and things might look pretty solid from Canberra.
But one potential problem is that the banks remain vulnerable because of their heavy reliance on international wholesale markets for funding. And we all know how things are looking there, at least from Europe’s perspective.
Related links:
The RBA’s ‘shocker’ Down Under (FT Alphaville)