Bank deposit guarantee: Fighting the credit crisis

Following the federal Government's move to guarantee bank deposits, Australian stock markets showed encouraging signs of improvement this week. Only recently Australian stocks had suffered their worst week since October 1987, and the (albeit slight) upturn recovery is a welcome relief for many. The Australian Government's aim to stabilise the market, with a $2.8 billion Reserve Bank cash injection into the banking system, initially appears to have reaped rewards.

What is the Government's bank deposit guarantee?

In a nutshell, the Australian Government's bank deposit guarantee is a promise to the Australian public that money they have deposited in banks, credit unions and building societies is safe. Guaranteeing an amount totalling an estimated $700 billion, the Government's move saw banking stocks rebound, paving the way for economic revival. It must be remembered, however, that details are still sketchy; Prime Minister Kevin Rudd only on the weekend announced a three-point plan that included the guarantee of bank deposits for three years.

Still, together with agreements by 15 Governments in Europe to underwrite inter-bank loans and protect financial institutions, the Australian Government's initiative is seen as a major step towards alleviating the credit crisis. Details of the plan revealed so far state that borrowings of Australian banks in global credit markets will be guaranteed and a further $4 billion of residential mortgage-backed securities will be purchased to help steady the mortgage market.

Australian stock market recovery

The Government's bank deposit guarantee has led to gains in the both the All Ordinaries index and ASX 200 this week , with the former closing 202 points up, while the latter closed 5.6 per cent up on Monday, 13 October. Signifying a fairly healthy recovery, as opposed to a token one, Westpac closed at almost 9 per cent up and ANZ led the way with a robust 13 per cent rise.

Whilst the initial market reaction is good, experts urge caution, making it clear that an initial recovery was to be expected but that concrete details and long term repercussions of the Government plan are as yet unknown. "The market's still very sceptical. Details (of the rescue plans) are yet to come out. We saw the futures (market) up quite substantially and then come off", said Ord Minnett private client adviser Tony Chidiac. It's possible that downturns will occur once more and that fear will still be prevalent amongst both investors and consumers with money deposited in banks and credit unions; only time will tell the true outcome. However, in the meantime, the Government's scheme, whilst not guaranteed to solve the credit crisis, is certainly a positive step in the right direction.