Australia to Buy A$4 Billion Mortgages, Revive Market...

Australia to Buy A$4 Billion Mortgages, Revive Market (Update1)

By Gemma Daley

Sept. 26 (Bloomberg) -- Australia's government will spend as much as A$4 billion ($3.3 billion) buying residential mortgage-backed securities to revive a debt market frozen by the global credit crunch.

The Australian Office of Financial Management will invest in two separate operations of as much as A$2 billion each, Treasurer Wayne Swan told reporters this afternoon in Canberra.

``We are doing this because the RMBS market has dried up as a consequence of difficulties in global financial markets,'' Swan said. ``There is a world of difference between this development and what is being debated in the U.S.''

Mortgage bond sales slumped 85 percent to A$2.5 billion a quarter since the middle of last year as international investors retreated from property lending after losses and writedowns from the U.S. subprime collapse swelled to $522 billion. That's crippled the ability of smaller banks and financial institutions to make loans to homebuyers.

``It's an extraordinary response in extraordinary times,'' said Shane Oliver, head of investment strategy at AMP Capital Investors, which oversees $81 billion. ``The move will provide extra funding, and may be an attempt to get funding costs down and apply further pressure on banks to pass on any rate cuts.''

Mike Smith, head of Australia & New Zealand Banking Group Ltd., signaled yesterday the nation's fourth-largest bank may not pass on to mortgage customers all of any potential central bank rate cuts when policy makers meet on Oct. 7.

The mortgage debt purchases, supported by the Reserve Bank, are intended to strengthen the nation's banking industry while ensuring that small banks can compete, Swan said. The nation's treasury department will administer the flow of funds and the investments are planned as temporary, Swan said.

National Australia Bank Ltd., the nation's third-largest lender, closed up 3.2 percent to A$25.80, gaining 20 cents after Swan's announcement. Commonwealth Bank of Australia, the largest mortgage lender, added 0.9 percent to A$44.43.

The Australian dollar fell 0.5 percent to 83.17 U.S. cents at 4:50 p.m. in Sydney, from 83.75 cents in Asia late yesterday.