The Australian Government is to offer to guarantee as much as $39 billion in State Government bonds to help the states cope fickle lenders and higher borrowing spreads after the global credit crisis drove up borrowing costs.
The scheme will be limited to Australian dollar borrowings for the states, which will pay the Federal Government a fee.
There is around a further $100 billion in existing state borrowings that the states can apply to have the guarantee attached to, for a fee.
The fee will range from 0.15% to 0.35% for existing and new stock, depending on whether the borrower is AAA rates or AA-plus, as Queensland is.
The banks have paid the Federal Government a fee of more than half a billion dollars by some estimates for guaranteeing their local and offshore borrowings.
Lenders have been demanding a premium to own Queensland’s debt rather than federal bonds and this has led to that state, and others finding it harder to finance borrowing campaigns.
Queensland has the biggest borrowing plan of all the states.
The states’ borrowing costs have risen partly because of the federal guarantee on bank funding made such debt more attractive to investors. That runs out in two and a half years time in most situations.
The gap had widened further after Standard & Poor’s cut Queensland state’s credit rating last month, and there are fears the ratings on NSW and perhaps Western Australia will also fall.
In a statement, Federal Treasurer, Wayne Swan said the hiatus in bond markets "threatened the capacity of state and territory governments to deliver critical infrastructure projects that will support jobs in the face of the global recession, as well as boost productivity and improve living standards in the medium and long-term.
The guarantee will be available for both existing and new issuances of securities, but will not extend to issuances denominated in foreign currencies.
The guarantee will be available over a range of maturities.
This will allow states to more readily structure their finance requirements to meet their longer-term infrastructure plans and prevent the potential crowding which would occur if the maturity of eligible securities was limited to shorter term issuances.
States will have the option to determine whether any eligible issuance is subject to the guarantee.
The guarantee also extends to the existing stock, should states choose to take up the guarantee for those securities. The option to guarantee existing stock is open to states for 28 days.
The Commonwealth will charge a fee for the use of the guarantee. The fee has been set according to historical experience of borrowing spreads, and at a level that provides an incentive for states to cease utilising the guarantee when market conditions normalise.
This approach will provide an appropriate set of incentives for those states which choose to use the guarantee. The guarantee fee needs to provide a balance between facilitating access to the market whilst also providing a disincentive to use the guarantee once market conditions have normalised.
The Government said "the volatility and significant uncertainty that is evident in the current market environment means that it will be necessary for the guarantee fee arrangements to be reviewed on an ongoing basis and revised if necessary.
"A website will be established to transparently display information on guaranteed securities and related scheme details.
"The Loan Council will provide an additional level of transparency and rigour to the operation of the guarantee, as state borrowing requirements will continue to be considered by the Loan Council through the Loan Council Nomination process. In particular, scrutiny via the Loan Council will ensure that the states have to account for their infrastructure spending
"The provision of a guarantee will increase the Commonwealth’s contingent liabilities, and this will be reflected in the Commonwealth’s financial statements.
"This change in the Commonwealth’s circumstances will also be reflected in the disclosure documents which allow banks and states to access foreign debt markets.
"The existing disclosure documents have been withdrawn and will be replaced as soon as possible with updated versions reflecting the details of the guarantee of state borrowing.
"The Commonwealth views the likelihood of state default as remote and unquantifiable.
"Nevertheless, should any payment be required under the guarantee it will be handled in a timely fashion."
