Australia's banks have been warned they will face the "wrath of the Australian government " if they push up mortgage rates in the face of a decision announced Sunday to stop guaranteeing their overseas borrowings.
The guarantees offered from October 2008 during the financial crisis enabled Australian banks, credit unions and building societies to borrow on the world's best terms taking advantage of the Australian government's AAA credit rating.
Declaring the decision to no offer no new guarantees after March 31 a "milestone in our recovery from the global recession" Treasurer Wayne Swan it would provide "no justification whatsoever" for rate hikes over and above those sanctioned by the Reserve Bank.
"The banks' interest rate margins are back to pre-crisis levels. They have as profitable margins now as they had before the crisis. The Australian people were bitterly disappointed with the behaviour of some of our banks at the end of last year. If any major bank were to attribute some move above the Reserve Bank's to this decision they would be wrong and would incur the wrath, not just of the Australian people, but of the Australian government."
Bankers Association chief David Bell disagreed saying "even though funding pressures have eased, the pressures are still higher than they were prior to the crisis".
Debt market analyst Philip Bayley from ADCM Services said the decision wouldn't add at all to costs for big Australian banks, but said some of the smaller banks might find fund-raising harder. "I don't think any of the big four have used the guarantee since December, but for some of the smaller banks there could be an impact," he said.
Financial institutions paid a fee for use of the guarantee. The government expects the guarantees to end up earning $5.5 billion over the life of the five-year loans.
Asked about concerns that some financial institutions had been behaving inappropriately by raising money with the guarantee and then lending it offshore Mr Swan conceded there was "a lot of scuttlebutt that you hear around the place".
But he said the scheme had been well-administered by the Reserve Bank and the Prudential Regulation Authority and that he didn't want to be "out there personally vetting applications."
Both APRA and the Reserve Bank advised that the scheme was no longer needed.
The government has also the deposit guarantee for big accounts worth more than $1 million but left in place the guarantee for smaller deposits which Mr Swan said account for 99.5 per cent of accounts.
It will stop guaranteeing state and territory government borrowing from the end of December.
"This is further evidence of the resilience and the recovery of the Australian economy," the Treasurer said.
Coalition treasury spokesman Joe Hockey said the move showed the stimulus was no longer needed.
"Government spending is now about marginal seat politics, it's not about the economy," he said.
Mr Swan said there was no point in talking about withdrawing the stimulus. Most of the $42 billion had already been committed.
"If you were rip out the rest of the stimulus for 2010-11 you would disrupt a whole pipeline of activity and damage the recovery," he said.
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