Federal govt guarantees state borrowing

The states will be able to raise cash more easily on international credit markets
for important road and building works with the backing of a federal government
guarantee.
Following a meeting with state treasurers in Canberra on Wednesday, federal
Treasurer Wayne Swan agreed to provide a temporary and voluntary guarantee,
supporting around $39 billion of debt, initially.
"Like bond markets around the world, state government bond markets have been hit
hard by the global recession," Mr Swan said.
"This has threatened the capacity of state and territory governments to deliver
critical infrastructure projects that will support jobs in the face of the global
recession, as well as boost productivity and improve living standards in the medium
and long term."
Global credit ratings agency Standard & Poor's said the ratings on state governments
will be unaffected by the decision.
The Australian Loan Council will keep a watchful eye on state levels of debt to make
sure the guarantee is not abused.
Legislation setting up the scheme will require parliamentary approval.
Opposition treasury spokesman Joe Hockey, who was briefed on the initiative, said he
had major concerns and that the opposition would "closely consider" the bill when it
was presented to the parliament.
"This is a classic example of where the Rudd government has made a global financial
crisis far worse because of bad policy decisions," he said in a statement.
Mr Swan denied that states were having problems raising debt because they were being
crowded out by government guaranteed bank debt raisings.
Still, Liberal West Australian Treasurer Troy Buswell said the initiative had the
support of all treasurers.
"This policy is not a green light for the state governments to go out and
irresponsibly engage in borrowings," Mr Buswell told reporters at a joint news
conference with Mr Swan and Queensland Labor Treasurer Andrew Fraser.
"It is in our mutual best interests for all states to behave responsibly."
The nation's peak infrastructure body - Infrastructure Partnerships Australia (IPA)
- welcomed the government's move to return certainty to the state bond market.
"Australia already faces an infrastructure deficit and we must ensure there is
continued investment in our productive capacity in spite of the global financial
downturn," IPA chairman Mark Birrell said.
While initial price reaction on the state, or semi-government, bond market was
limited, market analysts' reactions were mixed.
Head of research at National Australia Bank's nabCapital, Peter Jolly, said this was
a positive result for the states.
"Recently (investors) have shown very little willingness to hold semi-government
paper," Mr Jolly said.
He said the eventual removal of the guarantee was likely to be closely tied to the
withdrawal of the federal government's guarantee of domestic banks' funding and
deposits.
In October last year, the federal government guaranteed some $600-$700 billion of
deposits in Australian financial institutions to boost local confidence and offered
guarantees on bank funding in wholesales markets.
However, Aberdeen Asset Management portfolio manager of credit Stuart Gray said the
guarantee did not necessarily mean the states would be able to raise money cheaply.
"There are so many other choices at the moment," Mr Gray said.
Governments globally, including the federal government, are increasing their debt
raisings to fund initiatives to stimulate their economies and due to falling tax
revenues because of the global recession.
States will have the option to take up the guarantee on a new bond issue, and have
28 days to decide whether the guarantee extends to any existing bonds.
It does not cover bonds in a foreign currency.
Head of research at financial markets group Forecast, Ray Attrill, said it wasn't
"hugely surprising" that governments had gone down this route.
But he said the fees being charged by the federal government looked "pretty cheap".
"It's not particularly onerous at all," he said.
"I imagine most of the state treasurers have gone skipping and jumping out of the
meeting with Swan right down to the pub."