swan offers to guarantee states' debt

beware the slippery, slippery slope.......but then, we all new what would happen with labor.


http://www.theaustralian.news.com.au/story/0,25197,25240058-5013871,00.html

THE Rudd Government will provide a temporary guarantee for state government borrowings.

Treasurer Wayne Swan announced the move after a meeting with his state and territory counterparts in Canberra today.

The commonwealth will charge a fee for the use of the guarantee, calculated on the states' credit rating.

The states and territories have been hit hard as international liquidity has dried up in the global financial crisis.

Mr Swan said the action would support jobs and protect vital infrastructure plans from the global recession.

``Like bond markets around the world, state government bond markets have been hit hard by the global recession,'' Mr Swan said, announcing the guarantee.

``This important measure recognises that pulling back on critical nation-building infrastructure investment now would mean ever slower growth and higher unemployment into the future.''

The Treasurer said the commonwealth viewed the likelihood of state default as remote and unquantifiable.

``Nevertheless, should any payment be required under the guarantee it will be handled in a timely fashion,'' he said.

The guarantee will be available for existing and new issuances of securities, but will not extend to issuances denominated in foreign currencies.

It will also be available over a range of maturities, which Mr Swan said would allow states to more readily structure their finance requirements to meet their longer-term infrastructure plans and prevent potential crowding that would occur in a more limited scheme.

States will have the option to determine whether any eligible issuance is subject to the guarantee. The guarantee also extends to the existing stock, should states choose to take up the guarantee for those securities. The option to guarantee existing stock is open to states for 28 days.

The commonwealth will charge a fee for the use of the guarantee.

“The guarantee fee needs to provide a balance between facilitating access to the market whilst also providing a disincentive to use the guarantee once market conditions have normalised,” Mr Swan says.

The fee for triple-A rated states for the existing stock guarantee will be 15 basis points and for new issuance 30 basis points, while AA-plus rated states, will pay 20 basis points on existing stock and 35 basis points on new issuances.

Mr Swan has warned the current levels of market volatility and uncertainty means that it will be necessary for the guarantee fee arrangements to be reviewed on an ongoing basis and revised if necessary.

The Treasurer says the Australian Loan Council will keep a watch on debt levels.

“We think the level of borrowings at the moment is appropriate for our environment and that is why we are so serious about ensuring the states have the capacity to borrow to deliver on the vital investment,” he said.

“So we do have a view that we do need to keep an eye on how appropriate programs are in terms of their size.”

West Australian Treasurer Troy Buswell said it was in the states’ interests to behave responsibly.

“This policy is not a green light for the state governments to go out and irresponsibly engage in borrowings,” he said.