Australia goes bigtime: Not $700billion, but $1.4trillion

Image by David de Groot via Flickr

Guarantee of wholesale funding

In order to support confidence in funding markets and continued lending by Authorised Deposit-Taking Institutions (ADIs) to Australian corporations, businesses and households, the Government will offer a guarantee on debt securities issued by Australian owned banks, locally incorporated subsidiaries of foreign banks, credit unions and building societies. (list of banks and corporations protected)

The government will, of course, assess a fee for this service.

The reason Australia's banks are "amongst the world's best" is largely because of the astounding fees banks charge.

Bank fees

The first thing a local small businessman said, "As you would." - which translates in Australian in deep sarcasm something like: "And you're surprised you're getting screwed again? Why?"
He went on to tell me he was once with Bank of Melbourne. BoM had no fees. They were bought out by WestPac (about 7 years ago.)
Now, WestPac and all the other large banks charge fees for everything:

• Customers pay a fee to have an account with the bank.
• Get a statement. Pay a fee.
  The law says the banks have to issue statements. The law doesn't say they can't charge for it...
  
• Transfer money from one internal account to another. Pay a fee.
  Oh, and there's a 36-hour wait to protect you from fraud.
• Any and every access to any account incurs a fee.
• Deposits incur a fee.
  If it's a check or credit card, there is a graduated scale of charges depending on whether the card or check is from the same bank or some other bank - and at least a 5 working day delay on any check.
• Any communication with a bank incurs a fee.
  If you call to complain about poor
  

The standing joke is you can't walk past your own bank without paying a fee. You may get mugged or trapped if you walk past a bank where you don't have an account.
A young woman tripped over a a-frame sign last week in front of an AAB branch. She was taken to the emergency room, where she was accosted by three bank employees urging her to take out an account. - The sign announced that the bank would pay 8% on 3- and 6-month CDs. The average mortgage rate is 7.74%.
NAB was begging on the street for people to give it money at a rate below what it could charge for a mortgage!

$1.4 trillion bailout announced today

Today, Prime Minister Kevin Rudd announced Australia's answer to the US $700billion bailout. Australia will guarantee $1.4trillion in deposits and bank to bank lending for the next 3 years.

As the 8th (or 10th depending on whose list) largest economy in the world, that may be appropriate.
But when you compare a couple of figures, it does seem a little .. uh .. scary?

Australia's GNP is about $700billion.
65% of that economy comes from consumer spending. The mining and resources sector makes up only 15% or so of that figure.
Then toss in this little factoid: Australia borrows $400billion to $700billion from the US each year.

IOW, Australia borrows almost the whole of the GNP from the US year after year. At the least, Australia borrows equal to nearly all of the consumer spending each year.
That figure hasn't been put into perspective yet. However, deposits in foreign-owned institutions and foreign deposits will not be insured under the $1.4 trillion guarantee.

Nor has anyone mentioned where Australia would get that money if it were ever needed...?

It was only a year ago the AUD was headed towards parity with the USD.

It was only a month ago everyone in Australia seemed terrified of another interest rate rise.

Now, even with an interest rate cut, nearly 35% (over 900,000 of 3.7million) of Australian mortgaged homes are in financial distress. That probably translates into: "The mortgages should be repossessed. The banks just aren't prepared for the paperwork."