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Australian market rallies on bailout hopes -

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LISA MILLAR: The Australian share market has staged a recovery today, shaking off most of the
losses from yesterday's heavy falls locally and around the world.

Bargain hunters have dived back into banks and resources, in the hope that the United States
Congress will eventually pass the $700-billion bailout of America's financial system.

But the optimism could be short lived, with credit markets still frozen over in fear that the
rescue plan on its own won't be enough to avert a deep depression, a deep recession sorry, in the
United States.

Here's our business editor Peter Ryan.

PETER RYAN: This time yesterday the Australian share market was in freefall after the US House of
Representatives rejected a $700-billion bailout for America's fast sinking financial system.

Twenty four hours on the blood bath on Wall Street has become a 4.6 per cent rally, with growing
optimism that the rescue package will survive; at least in some form.

Investors in Australia had no choice but to follow the US lead with fingers crossed.

OLIVER STEVENS: We had a really positive lead, a lot of hope that this bill in the Congress can be
resurrected and it can be resurrected quickly.

PETER RYAN: Oliver Stevens is the head of dealing at IG Markets, this morning he saw the Australian
share market claw back more than three per cent, thanks to bargain hunting amid yesterday's ashes.

OLIVER STEVENS: It seems the rally was based more on hope than hard facts. We heard Congress saying
yesterday that they will to pass the bill, but we heard that also over the weekend and then they
failed, on Monday.

So until the actual bill is signed, I think there's a lot of concern. We also saw hopes of some
central bank rate cutting over the next few days as they try to help the liquidity squeeze that we
saw come to fruition yesterday.

PETER RYAN: But today's rally has done little to help credit markets which remain frozen over in
fear. As a result Oliver Stevens says the cost of sourcing money is spiralling by the day, as the
US congress negotiates a deal.

OLIVER STEVENS: We saw the overnight cost of borrowing US dollars rise over four per cent, 430
basis points, it was trading at over six per cent with the US Fed funds at two per cent, so
obviously there was a complete lack of dollars yesterday.

The ECB (European Central Bank) was loaning out dollars overnight at 11 per cent, nine per cent
above the US rate. Everyone is trying to hoard US dollars, and that's really what's causing a lot
of concern, the money markets have dried up.

PETER RYAN: And is that really bringing us closer towards a point where the banks might consider
rationing credit because of the higher cost of sourcing money?

OLIVER STEVENS: I think that's definitely going to be the case, what we're going to see next week,
the RBA is expected to start, to continue cutting rates, with many people expecting a 50 basis
point cut in the meeting next Tuesday, and then probably a total of a hundred basis points before
the end of the year.

The question is whether the banks can afford to pass that on.

PETER RYAN: Josh Williamson of TD Securities, says with banks still worried about more shocks in
the pipeline, customers seeking mortgage relief could be disappointed.

JOSH WILLIAMSON: Banks are still hoarding cash, they're still scared to lend to each other, they're
still scared of further losses and write-downs and further nasty surprises from the global subprime
liquidity crisis, and they're wanting to keep their cash in-house in case they might need it

PETER RYAN: Josh Williamson is expecting interest rates to be cut by a quarter of one per cent,
perhaps even half a per cent when the Reserve Bank board meets next Tuesday.

But he says the RBA has a delicate balance between helping anyone with a mortgage and restoring
confidence and liquidity to the banking sector.

JOSH WILLIAMSON: Yes I think it will be designed to actually put some pressure on banks to ensure
that something is passed through, it's also got to be designed to instil more confidence I think in
consumers, households and everybody in the economy generally, that the Reserve Bank is prepared to
do their part.

Because we know that interest rate changes do affect consumer sentiment, they do affect business
sentiment as well. So there's a few things the Reserve Bank going to be wanting to be kick starting
here with the, continuing with the rate cut next week.

It's just a bit up in the air how much is going to be passed through. You know, we want the
politicians of course, who want to see as much of that rate cut passed through, mortgagee's, and
I'm one of them want to see that passed through as well.

PETER RYAN: But whatever the Reserve Bank decides, Oliver Stevens of IG Markets says the days of
easy credit will soon be gone.

OLIVER STEVENS: We're not going to see 100 per cent mortgages anymore, people are going to require
more deposits, you know, in the US and the UK now you're requiring a 25 per cent deposit on most
mortgages. Now only a year or two ago people were looking at a five per cent deposit, some people
were even getting 110 per cent mortgages, that is not going to happen anymore.

Those with a poor credit history are going to find it difficult to get loans; if they do they're
going to be paying a lot more than they were 18 months ago. So that's obviously going to have a big
knock-on effect in the retail sector and to the economy as a whole.

LISA MILLAR: That's Oliver Stevens of IG Markets ending that report from business editor Peter