Australia to Guarantee Bank Deposits for Three Years

By Angela Macdonald-Smith

Oct. 12 (Bloomberg) -- 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 today 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 U.K. last week agreed to guarantee loans between banks, while Ireland, Greece and Germany are among nations that have pledged to guarantee savers' deposits.

``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.

Between A$600 billion ($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 ($12,865) each.

`Dangerous Phase'

``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.

`Safe Haven'

``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.

The steps come as Treasurer Wayne Swan said the government will review budget spending commitments because of the financial crisis, which will cut economic growth.

``We will put everything on the table because our bottom line is responsible economic management,'' Swan told Australian Broadcasting Corp.'s Insiders program today from Washington.

Unemployment is likely to increase more than forecast in the last budget, though it's too early to say by how much, he said.

Separately, the New Zealand government said it will guarantee retail deposits in New Zealand-registered banks, in building societies, credit unions and deposit-taking finance companies. Institutions need to opt in to the system, which will last for two years initially, to have deposits covered, Finance Minister Michael Cullen said in an e-mailed statement.

The plan will be free for institutions with total retail deposits of less than NZ$5 billion ($3 billion), while a fee of 10 basis points a year will be charged on those with higher deposits. A bank with NZ$20 billion in retail deposits would pay NZ$15 million in fees a year, the ministry said.

``We want to ensure that ordinary New Zealanders feel that their deposits are safe in the current uncertain international financial market conditions,'' Cullen said in the statement.

To contact the reporter on this story: Angela Macdonald-Smith in Sydney at amacdonaldsm@bloomberg.net