Credit Rating

Canberra Urged To Use Its Credit Rating To Ease Crisis

27 March 2008

HOUSEHOLDS and businesses could be insulated from the global credit crisis if the Federal Government used its AAA credit rating to guarantee loans, according to a Melbourne Business School report.

It says that unless the Government protects lenders that have become "casualties" of the turmoil from the US subprime mortgage crisis, competitiveness will erode and Australians will face higher interest rates.

The report, by Joshua Gans and Christopher Joye, calls on the Government to establish an independent agency - "AussieMac" - that would provide immediate liquidity to Australian securitisation markets that have been effectively closed by the global credit crunch. Professor Gans, from the Melbourne Business School, said the Government should use its strong standing in credit markets to protect households and businesses against the instability flowing from the crisis.

"We propose that the Government, which is a AAA-rated borrower, effectively guarantee some of these loans," he said.

"They step in where the market has dried up for securitisation. This is not unprecedented. Similar systems operate in the US and Canada."

The report suggests that the presence of an agency such as AussieMac could have other benefits, such as having interest rates that are 25-50 basis points lower than they would otherwise be.

Professor Gans said his biggest fear was that as credit was rationed - because more people were applying for a limited pool of loans - smaller players would leave the market.

Macquarie Bank has already shut down its lending for homes.

"If all the entry we've seen into the banking sector over recent years goes away, we are left with the five major banks," he said.

"It's going to be very sad when the Reserve Bank lowers interest rates in a few months' time, and we find that home-loan mortgage rates don't follow."

Mr Joye, managing director of research and investment firm Rismark International, said there was no risk to the Government's AAA credit rating because the loans would be insured and would only be made to low-risk borrowers.

The loans would be available to all the market, including the Big Four banks, but primarily would be used to help smaller lenders operating in securitisation markets.

Mr Joye said unlike the US and Canada, Britain did not have such a scheme. "If there had been a similar market, Northern Rock wouldn't have fallen over," he said.

Nicholas Gruen, chief executive of Lateral Economics and Peach Discount Mortgage Broking, welcomed the idea.

"The Government has put enormous effort into strengthening its own balance sheet and it's not doing anything with that balance sheet," Dr Gruen said.

"The point of having a strong balance sheet is to assist the economy.

"The essence of this is to guarantee very safe loans. It's something that should be done carefully. But it should be handed to people who are arm's length from government."

Nationals senator Barnaby Joyce said it might be necessary to have such a scheme to ensure sufficient liquidity, but he was worried that it could affect the Government's AAA credit rating.

Back to News Index | Back to Home