Australia | Oct 13 2008
By Greg Peel
Not everyone likes the idea, including the banks themselves and some commentators still wasting our time by dragging out the moral hazard chestnut, but the Australian government has announced it will guarantee the $1.2 trillion of domestic deposits in Australian banks, building societies and credit unions, and deposits in local subsidiaries of offshore-based institutions.
The move comes as a response to the G20 meeting in Washington yesterday and mirrors actions announced by Europe. It is a no-brainer that the major economies of the world would never be able to fully coordinate, and the earlier G7 meeting and its subsequent pronouncements confirmed exactly that. What did the G7 decide? That it would do anything necessary. What specific action did it announce? None.
The stock market rally in New York on Friday (from the low point to the close, albeit a close which was still down on the day) had a lot to do with expectation that the G7 would agree to step into the financial market and guarantee all loans between banks. The kernel of the problem currently existing in the global financial market is that no bank is prepared to lend to another for fear that the borrower may not see out the week. Were all governments in the G7 prepared to guarantee those loans, then there would be no reason for a bank to fear default on its loans and the wheels of the global economy could begin to turn once more.
That did not happen. The exasperation on the face of US Treasury secretary Hank Paulson at his press conference was clear, but he clearly knows full well which particular economy is the most guilty in this crisis. However, over the weekend a fracturing Europe decided it was time to put away a few thousand years of ethnic rivalry and act in unison. The very survival of the concept of a European Union depended on it, if nothing else.
Europe announced it would guarantee all bank loans through 2008-09 and charge a commercial fee to do so. It also announced it would acquire equity in European banks where necessary. The latter was already a part of the vague five-point plan announced following the G7 meeting on Friday. The former is a new development either stemming from the G20 meeting or stemming from the fact someone pointed out that the G7 result was no less than inadequate.
The G20 could be construed as the G7 and “ladies bring a plate”. However, in response to the measures announced by Europe the Australian government has announced it will guarantee all bank deposits for three years. The argument can be put that such a move was necessary to prevent the sudden withdrawal of money from Australian institutions to be placed in what now were “safer” European institutions. Such a move is pragmatically unnecessary in the greater scheme of things, but effective from an emotional point of view. And at the moment, emotion rules.
It was also heartening to see that someone finally got to Australia’s leader of the opposition – a man of intelligence and promise – and told him to pull his stupid head in. Now is not a time to score petty political points from the great unwashed. All democracies need leadership in times of crisis. The government announcement has received bipartisan support.
Yesterday I had lunch with my friend Clive. He is a property master for the Australian Opera Company. He doesn’t have a fortune, but he and his partner have been putting in the hard yards and putting their money away over the last few years. They have an ultimate grand plan, which one might call a “sea/tree change”. A cockney by birth, Clive is always the first to make a dry quip about any situation. I’ve known him for ten years, and yesterday was the first time I have ever seen him overtly worried. His money is in simple term deposits. His first question to me was, “Should we take it out?”.
My answer was no, and that was before the Australian government announced this new guarantee. It will be argued that the government’s move was not warranted in practical economic terms. But it is not practical economic terms that have sent the stock market down 20% in a couple of weeks. It is pure human emotion. In such circumstances, reassuring action is needed. The vast majority of the Australian public, and the world’s public, does not understand why this is all happening. They are just plain scared. Such fear needs a response from those we elect or appoint to lead us.
What effect will these latest global action plans have? It would be foolish to assume that this must now be the turning point. There is every chance the selling has not yet ended. However there is also every chance we may have found a “time-out”. If the stock market does collapse again today, we should be at least nearing the last of it in the short term. If it rallies, it will not signal the beginning of the next great bull run.
A lot will depend on the reaction in Europe and the US tonight.