Thursday, March 26, 2009

Have a lend - of our AAA rating

AUSTRALIA'S Treasurer has offered cash-strapped Australian states a lifeline, promising to let them use his government's AAA credit rating in return for a fee.

The move will be of minimal use to Victoria which already has a AAA rating but be vital for NSW whose AAA rating is on "negative watch," for Western Australia whose AAA rating is at risk and for Queensland whose rating has been cut to AA+.

Until the announcement, made after a Treasurers' meeting in Canberra, Queensland had been finding it harder to borrow than had the banks, building societies and credit unions that made use of the Commonwealth's wholesale funding guarantee.

"The credit market has been dysfunctional," said Queensland's Treasurer Andrew Fraser. "This will allow us to deliver infrastructure".

RBC Capital Markets fixed income strategist Su-Lin Ong said the state fund raising market had been "effectively illiquid and frozen" since the downgrade of Queensland on 20 February 20", tarnishing every states' attempts to borrow...

A spokesman for Victoria's Treasurer John Lenders said he did not expect his state to make use of the guarantee, promising "business as usual".

Australia's states have 28 days in which to decide whether to accept the offer for their existing debt.

Deutsche Bank Australia economist Tony Meer said expected states such as Victoria to join up regardless of their protestations in order to avoid "orphaning" their existing debt.

TD Securities economist Stephen Koukoulas said the debt to be "hoovered up by investors at a rapid rate" given the Commonwealth's AAA guarantee and also the high yield being offered by states.

Meeting as the Loans Council, the state and Commonwealth Treasurers yesterday approved $13 billion of state borrowing during this financial year and $26 billion in the next.

Much of the money will be used to fund with the Commonwealth the big-ticket infrastructure projects due to be given a tick by Sir Rod Eddington's Infrastructure Australia task force within days.

It will also make it easier for state governments to borrow on their own if their private partners in infrastructure projects drop out.

Mr Swan offered the Opposition a briefing and called for bipartisanship. But Shadow Treasurer Joe Hockey said gave no guarantee of support for the legislation saying the Treasurer had made a bad situation worse.

"This is a direct consequence of the government guarantee of bank funding. Banks have been competing with the states, making it more expensive and harder for the states to fund themselves," he said.

Mr Swan stressed that the offer was temporary, to be lifted when “normalized credit market” conditions return. "We don't want to stay in this groove for any longer than we have to," he said.

The guarantee will be limited to borrowing in Australian dollars. Economists say this will support the dollar as offshore lenders buy them in order to lend them to Australian states.

In a further bleak economic development yesterday Japan announced record drops in both exports and imports. Japan's exports effectively halved in the year to February, sliding 49.4 per cent. Its imports slid 43 per cent.

2 comments:

Anonymous said...

This seems like a sensible initiative.

Al

MkeM said...

I thought it didn't matter at present what the states' credit ratings are. Nobody gives much credit to the credit raters, but may think that the Commonwealth is less likely to renege on its debts than even an AAA state.

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