Australia's Swan Says U.S. Rescue Not `Magic Bullet'

By Robert Fenner

Oct. 5 (Bloomberg) -- Australian Treasurer Wayne Swan said the $700 billion financial-rescue plan signed by President George W. Bush won't be enough by itself to restore confidence in the world's financial system.

``I don't think there's any magic bullet here,'' Swan told Channel Ten's Meet the Press program today. ``But this package was absolutely essential, absolutely essential to deal with the problem at the core of the U.S. financial system, which is the bad debts in the banking system.''

American lawmakers passed the bailout on Oct. 3, giving the U.S. Treasury the ability to buy mortgage-backed securities and other troubled assets obstructing lending. Swan expects a ``rocky road'' as the global economy adjusts to the package and lending recovers from the credit crunch.

``The bailout is a good first step toward restoring confidence by cleaning up the banks and getting credit markets working,'' said Craig James, a senior economist at Commonwealth Bank of Australia in Sydney. ``Phase one is out of the road now and phase two is the workout process for this bailout; it will take some time.''

Swan declined to comment on what Australia's central bank may do when it meets next week, with all 18 economists surveyed by Bloomberg News expecting the Reserve Bank will cut borrowing costs for a second straight month.

Funding Costs

``In the coming months we should see most of the world's central banks moving to stimulate growth and that is very encouraging,'' said Commonwealth's James.

Rising wholesale funding costs in money markets may make it difficult for Australian banks to pass on in full any reduction to customers, Swan said. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in euros increased to an all time high of 5.33 percent last week, the British Bankers Association said.

``It is absolutely vital at this time that we have a stable banking sector,'' Swan said. ``What the government expects from the banks, is a maximum possible flow-on that is economically responsible and consistent with the stability of our banking system.''

Swan said it's ``too early'' to estimate how a slowdown in the global economy would cut Australian government revenue.

To contact the reporter on this story: Robert Fenner in Melbourne rfenner@bloomberg.net