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House of Assembly - Fifty-First Parliament, Third Session (51-3)
2009-03-26 Daily Xml
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Ministerial Statement

AUSTRALIAN LOAN COUNCIL

The Hon. K.O. FOLEY (Port Adelaide—Deputy Premier, Treasurer, Minister for Industry and Trade, Minister for Federal/State Relations) (14:02): I seek leave to make a ministerial statement.

Leave granted.

The Hon. K.O. FOLEY: I rise today to advise the house of the outcome of the 149th meeting of the Australian Loan Council. The next one will be a big event because it will be the 150th. Yesterday, state treasurers met with the federal Treasurer, the Hon. Wayne Swan, for our regular Ministerial Council for Commonwealth-State Financial Relations or, as it is more commonly known, the Treasurers' Conference. At these conferences, the state treasurers and the federal treasurer also meet at least annually as the Australian Loan Council.

The council was established to coordinate borrowings by commonwealth and state governments. I am advised that its history lies in the 1920s when the commonwealth and states found themselves in competition for funds on credit markets. Funny that. Today the council oversees the borrowing programs of all jurisdictions. Each jurisdiction has a loan council allocation for a financial year which represents their total borrowing program for their general government sector and the non-financial public sector.

Each jurisdiction nominates their allocation for the following financial year and the council considers the total program across all jurisdictions. While the council is not empowered to authorise or prohibit borrowing programs, it is an important mechanism for coordination and transparency.

In the difficult financial climate of recent months, there has been speculation that states may struggle to raise sufficient capital to meet their funding requirements. The speculation has centred on states with large borrowing programs, particularly Queensland, which have very large infrastructure programs in the coming years. However, it is also a concern here for South Australia.

As credit markets have contracted, the cost of borrowing money has increased. The price premium charged in the markets above the commonwealth bond rate has increased significantly by over 80 basis points since May 2008. More importantly, some states have expressed concern with their ability to raise funding to meet their infrastructure programs.

To resolve these difficulties, yesterday the commonwealth announced that it would guarantee state-issued borrowings. States are now able to seek guarantees for their existing stock of debt and on their new debt to be raised in the future. The commonwealth will seek a fee from participating jurisdictions for providing that guarantee. For AAA rated states the fee bill will be 15 basis points above the commonwealth bond rate for existing debt and 30 basis points for new debt.

For AA+ rated jurisdictions, the fee will be 20 basis points for existing debt and 35 basis points for new debt, and that charge does represent the 10 year average for the premium paid by semi-sovereign states on their debt and bond issuing above the commonwealth rate. States have 28 days to notify the commonwealth of whether they will use this facility for existing debt and to what extent. I will be working with Treasury officials over this period to determine if and to what extent South Australia uses this guarantee facility.

However, I can say that, regarding South Australia's future borrowings, given the attractiveness of guaranteed state-issued debt to the credit markets, it is likely that we will be participating. I understand that the guarantee has had an immediate effect, with reports today of the cost of state borrowing falling within minutes of the announcement. It should be noted that this will be a temporary arrangement to be reviewed by the Loan Council and to be revoked once the credit markets return to a more normal environment.

This is an important initiative of the commonwealth. It was one fully supported by all jurisdictions, of both political persuasions, with the Western Australian Treasurer, Troy Buswell, joining federal Treasurer, Wayne Swan, and Queensland Treasurer, Andrew Fraser, in a press conference to announce this guarantee.

While South Australia was not in the same position as some of the larger states in terms of issuing debt, this delivers significant benefits to our borrowing program. Members might be aware of a report in the Australian Financial Review yesterday of the success of the South Australian Government Financing Authority, which raised $500 million of debt on Tuesday. This shows that South Australia remained an attractive borrower to the credit markets, but it should be noted that this is relatively short-term debt with a maturity of August 2010. The longer-term outlook for state borrowings without the commonwealth guarantee was far more uncertain.

The guarantee provides confidence and certainty in the credit market and will make it easier for states to finance their large infrastructure program. I thank the commonwealth Treasurer, Wayne Swan, and federal Treasury officers for providing this arrangement. It is a further indication of the Rudd Labor government's capacity, intellect and ability to deal with what is the global financial crisis.

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