The Crest of the Commonwealth of Australia Treasury Portfolio Ministers
Picture of Wayne Swan

Wayne Swan

Deputy Prime Minister and Treasurer

3 December 2007 - 27 June 2013

25 March 2009

NO.027

Temporary Guarantee of State Borrowing

The Rudd Government will take further action to support jobs and protect vital infrastructure plans from the global recession by providing a time-limited, voluntary guarantee over state government borrowing.

This important measure recognises that pulling back on critical nation-building infrastructure investment now would mean ever slower growth and higher unemployment into the future.

Like bond markets around the world, state government bond markets have been hit hard by the global recession.

This has 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.

That's why the Rudd Government – in consultation with the state and territory governments – has taken this decisive action to support jobs and protect vital nation-building plans.

Details of the scheme

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 (see below).

Credit Rating Fee (existing stock) Fee (new issuance)
AAA 15 basis points 30 basis points
AA+ 20 basis points 35 basis points

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 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.

CANBERRA
25 March 2009