Rudd makes the right call, but things missing

October 13, 2008

The Australian Prime Minister announced yesterday that the Government would guarantee all deposits in Australian Banks, Building Societies and Credit Unions. Right move. The previous cap was $20,000 and it only applied to banks.

I don’t have hard figures, but I heard the word “cash hording” on the ABC last week in an Australian context, so although there may not have been a run on the banks, some people were obviously taking cash out. Our current term deposit is coming up, and we were thinking of taking at least some of it out in cash as well, just in case, particularly given it’s invested with a credit union and didn’t have Government support until now.

The scheme though doesn’t seem to extend to other institutions that take money, for example finance companies (the motoring associations for example offer investments to raise money for lending), so we’re still going to see a cash deficit in non bank lenders to some extent.

The second part was $4 billion acquiring Residential Mortgage Backed Securities. This at least props up some of the non-bank mortgage market, so it’s a good move.

There’s also this line “The Australian Government will also guarantee wholesale term funding of Australian incorporated banks and other authorised deposit-taking institutions,” which the press and PM’s office is saying will help banks raise capital. Good move.

The announcement addresses some of the bigger problems facing the Australian market: cash deposits, and mortgages, but it seemingly ignores two areas: non-mortgage finance and non-bank finance. Backing up deposits means that there won’t be a drain on cash at hand to lend, but it doesn’t fully address the roll-over issues facing banks on external debt instruments used for domestic borrowing (the wholesale funding guarantee does in part), and it doesn’t address to a large extent business finance. We’ve got to presume that borrowing capacity will reduce, and the flow on to that will be lower business growth. Maybe the Government’s largess is incapable of going that far.