Wednesday, January 21, 2009

What's next? Government guaranteed business loans

Declaring that “when markets fail, governments must act” the Prime Minister has raised the prospect of the government itself arranging finance for Australian businesses denied loans by international lenders.

Delivering the second of his Australia Day addresses in Adelaide Mr Rudd expressed alarm at what he said was a growing trend for cash-strapped foreign banks to scale back their lending to businesses in Australia, in some cases declining to roll over existing loans as they come up for renewal.

Some $75 billion in foreign loans are fall due in the next two years.

"If foreign banks do not roll over their share, it would be difficult for Australia’s four major banks to fill the gap on their own," the Prime Minister said. "Companies could be forced to sell assets, often at low value"...

"When businesses cannot get loans and are not confident about the future, they can’t or won’t invest, meaning they can’t create jobs and they can’t grow," he said.

"This affects real businesses and affects real jobs."

In December the government helped set up a $2 billion so-called Special Purpose Vehicle to channel funds to car dealer financiers whose foreign funders had withdrawn.

The government agreed to guarantee securities issued by the vehicle.

Mr Rudd said he was prepared to to the same sort of thing to ensure the supply of credit to the wider Australian business community could it become necessary.

“When markets fail, governments must act,” he said.

The arrangement would see the government effectively extending its guarantee of bank borrowing and car financier borrowing to all borrowing by Australian businesses unable to roll over loans, most probably in return for a fee.

"Australian credit markets are international – and Australia has gained much from the internationalisation of our banking system over the last 20 years," the Prime Minister said. "But internationalisation comes with risks that must be managed."

"The Government stands ready to take whatever further action is necessary to stabilize financial markets, and to help reopen the private lines of government to business, to get blood flowing through the arteries of the economy."

Many European and American banks, effectively nationalised, are under pressure to cut back on what they believe to be non-core operations including lending to far-flung destinations such as Australia.

The Prime Minister told his Adelaide audience that he believed some had already done so.

He met with the Treasurer Wayne Swan and Finance Minister Lindsay Tanner in Adelaide yesterday to continue talks begun in Sydney Monday about responses to the economic crisis.

The background from Andrew Main