Kevin Rudd buys time with new plan on bank guarantees

INVESTORS in cash management trusts remained in limbo last night after the Rudd Government's bid to end confusion over its guarantees.

INVESTORS in cash management trusts remained in limbo last night after the Rudd Government's bid to end confusion over its banking guarantees failed to provide a plan to stop non-bank financial institutions haemorrhaging funds.

Wayne Swan waited until after markets had closed yesterday to reveal that, from November 28, banks would have to pay the Government a fee of between 0.7 and 1.5 per cent for the privilege of a government guarantee for their wholesale funding. Buying the guarantee will be optional for big deposits, while deposits of under $1 million will receive a government guarantee for free.

Despite the clarification of the Government's position, more cash management trusts and mortgage funds are expected to close their books for withdrawals next week as investors seek the safety of term deposits in the major banks.

Markets remain extremely volatile, with the S&P/ASX200 falling a further 3.1 per cent yesterday to 3869 points. It has dropped by 10.9 per cent since a brief moment of optimism on Tuesday. European markets recorded heavy falls in early trading last night, with Germany down 10 per cent and London off more than 7 per cent.

The Australian dollar sank to a five-year low, losing 4.2 per cent to end domestic trading at US63.91c, down from US66.71c yesterday. It was the dollar's lowest close since September 3, 2003.

Crisis talks will be held next week, with Mr Swan appointing Treasury secretary Ken Henry and Australian Securities and Investments Commission chairman Tony D'Aloisio to consult with the non-bank financial sector to identify what the Government could do to help financial institutions that are not covered by the guarantee.

Investment and Financial Services Association chief executive Richard Gilbert said: "We look forward to meeting Monday next week, because this is an urgent issue."

Financial institution call centres have been swamped with calls by worried investors. About 30 money market funds with about $20 billion under management have frozen redemptions so far.

The Treasurer said financial markets should not consider the guidelines he announced as the Government's final position.

"There will be work to do because we are in the middle of a global financial crisis where things change that do have a dramatic impact over time," Mr Swan said. "We are ready to act on further advice we may receive."

Australian Finance Conference executive director Ron Hardaker said discussions with Treasury over the past week had not settled anything. "There's really nothing concrete at this point, because it ishappening very quickly and (affecting) a different part of the finance sector every second day," Mr Hardaker said.

He said the only option would be to get some sort of injection of liquidity from the Government and some form of underwriting that provided confidence.

In the US, the corporate regulator, the Securities and Exchange Commission, has stabilised the market for similar funds by offering a three-month guarantee for a fee.

Cash-management trusts and other similar funds have total assets of about $60 billion, while the holdings of the funds management industry in cash and short-term securities total about $250billion.

Mr Swan said the Government's guarantees were always intended to apply only to regulated deposit-taking institutions.

"Other market-linked investments are not deposits but they are a very important part of our economy and capital formation in our economy," the Treasurer said.

Opposition Treasury spokesperson Julie Bishop said the Government's announcements yesterday failed to resolve the crisis in investment markets.

"Given the Treasurer's lack of action today, Australians must assume the Government does not understand the hardship caused to people who have had their savings frozen as a direct result of Government action," she said. "It is now 12 days since the Government's hasty and ill-conceived announcement, and thousands of Australians now find they are unable to access their savings."

Mr Swan said his suggestion on Thursday that people facing hardship as a result of having funds frozen should contact Centrelink reflected his six years as Labor's social services spokesman.

"There are a range of ways Centrelink can help Australians who for a temporary reason may have experienced a lack of income," he said.

Mr Swan said the Opposition should not use the financial crisis for short-term political gain.

National Australia Bank chief executive John Stewart backed the Government's guarantee, and launched a thinly veiled attack on the Coalition. "It is unfortunate this process has been so highly politicised, and this has been unhelpful in the markets."

The Government's new guidelines are similar to those proposed by Reserve Bank governor Glenn Stevens in advice to the Treasury on October 17, which was revealed in The Australian.

The Government's announcement followed a cabinet meeting and a hastily arranged discussion in Canberra on Thursday night with the chief executives of the four big banks. The Government's proposals were then discussed by a meeting yesterday of the Financial Regulators' Council, which includes the Reserve Bank, ASIC and banking regulator APRA.

"We've taken today's decisions on firm advice of our regulators," Mr Swan said. "We will continue to take advice form them as future adjustments are required."

The Government will charge the banks a fee for its guarantee that will vary according to their creditworthiness.

The big four banks, which have AA ratings, will pay 70basis points, while the building societies and banks such as the Bendigo Bank will pay 150 basis points for a government guarantee.

Institutions can choose whether to have their deposits of greater than $1 million guaranteed or not. The big banks are expected to choose not to.

Only 0.5 per cent of depositors have more than $1 million in their accounts. They are mainly businesses and they amount to more than 25 per cent of total deposits.

Mr Swan said a guarantee would be be offered to the branches of foreign banks operating in Australia. These were initially excluded from the scheme, and faced a drain on deposits.