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Rudd Govt forced to defend bank deposit guarantees.



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7.30 Report Rudd Govt forced to defend bank deposit guarantees

21/10/2008

KERRY O'BRIEN, PRESENTER: While the Reserve Bank governor today expressed the ever so slightly reassuring view that the likelihood of a global catastrophe has declined over the past couple of weeks, the Rudd Government is under pressure to clean up some unintended consequences from its recent package of guarantees to bank deposits.

The unlimited guarantee to banks, building societies and credit unions has sparked a flow of money from other investment funds into the safe haven of the banks.

The Government says it's working with the regulators, including the Reserve Bank, to fine tune its package, but the Opposition has seized on a newspaper report that the Prime Minister and Treasurer had ignored advice from the reserve to put a cap on the bank guarantees.

In a heated parliamentary debate both Kevin Swan and, sorry, both Kevin Rudd and Wayne Swan, said there was no conflict with the Reserve Bank, but conceded some changes are needed and announced that wealthy investors with more than a million dollars in bank accounts would have to pay an insurance premium.

We'll be talking with the treasurer in a moment but first here's political editor Michael Brissenden.

JAMIE BRIGGS, LIBERAL BACKBENCHER: It is quite an extraordinary development to have the Reserve Bank governor warn that this package might actually make the financial crisis worse.

CHRISTOPHER PYNE, OPPOSITION EDUCATION SPOKESMAN: This is a very serious matter 'cause Mr Rudd of course tries to play on his integrity and his honesty with the Australian people.

MICHAEL BRISSENDEN, POLITICAL EDITOR: Yes, the Opposition came armed again with a list of questions.

We're told repeatedly that support for Government's response to the global financial crisis is of course bipartisan. But that doesn't mean an Opposition has to throw in the towel completely, particularly when the papers are running headlines that suggest the Government may have gone too far.

Evidence is starting to emerge that the unlimited guarantee given to all bank deposits announced by the Prime Minister the weekend before last has begun to have a serious impact elsewhere in the financial system.

Financial experts say we're already seeing a flight of capital from financial institutions not covered by the guarantee.

PROFESSOR FARIBORZ MOSHIRIAN, SCHOOL OF BANKING, UNSW: The consequence of obviously this policy has been that some of the other smaller players such as mortgage funds and other sectors within Financial Services are now affected as result of this guarantee, which is not covering, obviously, their sector.

MICHAEL BRISSENDEN: Money is already flowing out of the much smaller mortgage funds sector and at least one has put a freeze on withdrawals.

Spurred on by a story in today's The Australian newspaper that claimed the Reserve Bank governor had in fact warned against an unlimited deposit guarantee because this dislocation in the financial system and a flight of capital would be one of the consequences, the Opposition was on the attack early demanding a prime ministerial explanation.

MALCOLM TURNBULL, OPPOSITION LEADER: The Prime Minister must come into the house today and make a ministerial statement clearing up the mess he has created by his mishandling, his confused mishandling, of the deposit guarantee matter.

KEVIN RUDD, PRIME MINISTER: Good afternoon everybody.

MICHAEL BRISSENDEN: Malcolm Turnbull sited statements made by the Prime Minister at his press conference announcing the guarantee, and on a number of occasions that followed, that indicated the decision to introduce the unlimited guarantee was taken on advice from the regulators, including the Reserve Bank.

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KEVIN RUDD: The measures I’ve announced today are based on the advice of Australia's economic regulators. The measures I’ve announced today have been the product of extensive deliberation between myself, the Treasurer and other ministers who are members of the strategic policy and budget committee of the Cabinet.

MALCOLM TURNBULL: Now, the Australian people and the Opposition took him on trust. We took him on trust and we believed that the deposit guarantee was as recommended to him and his Government by the Reserve Bank of Australia, which is, I remind you, the regulator that is responsible for systemic stability.

MICHAEL BRISSENDEN: And the questioning continued in the Parliament. Did the Reserve Bank recommend an unlimited deposit guarantee and on whose advice was the decision taken?

KEVIN RUDD: What I said before Mr Speaker was that when the options were put before the Cabinet committee for which I've just referred, I then spoke to the Secretary of the Treasury and said "is this the recommendation of the regulators?" to which he said "Yes."

It was on that basis that the Government acted and can I say to the honourable gentleman-

MR SPEAKER: Order.

KEVIN RUDD: -I refer him in his hyperventilating state this morning-

MR SPEAKER: Order, that question has been asked.

KEVIN RUDD: -chucking cartwheels around the house as he's taken far too great an intake of seriously-

MR SPEAKER: Order.

KEVIN RUDD: -deep red cordial this morning. I quote the Reserve Bank Governor, the Reserve bank Governor who says this today, who said this less than a couple of hours ago-

MR SPEAKER: Order.

KEVIN RUDD: -that the decisions announced by the Government then were sensible and the Reserve Bank of Australia supported them.

MR SPEAKER: Member for Sturt.

KEVIN RUDD: The Reserve Bank of Australia supported them.

MICHAEL BRISSENDEN: The point of all this is that, although they've yet to produce any evidence, the Opposition is convinced the Reserve Bank did not support the idea of an unlimited guarantee even though, as the Prime Minister says, the Governor has today said he supports the Government's decision.

And the Opposition says there was certainly an impression that the regulators were involved directly in the discussion on the weekend the decision was taken.

But the Government has confirmed the communications channels may have been a little less direct. But is this just splitting hairs?

The decision was made, the Reserve Bank Governor supports it, and economic analysts say the Australian Government had little choice but to follow what had already been done overseas.

This morning Mr Turnbull said he wasn't aware of a comparable country that had established an unlimited deposit. But in fact Ireland did and many European governments followed in the days before Australia acted.

PROFESSOR FARIBORZ MOSHIRIAN: In Australia we didn't have a choice but to guarantee all the deposits in major banks and credit unions, simply because otherwise we were going to see that money flowing out of Australia and our four major banks would have more challenges of liquidity.

MICHAEL BRISSENDEN: Nevertheless the Government has conceded today that some changes are needed. The Treasurer has announced that there will now be an insurance fee charged to those who have savings of more than $1 million.

But the Opposition wants more. Not content with probing the Government, Mr Turnbull this afternoon turned his sites on the Treasury Secretary Ken Henry as well.

MALCOLM TURNBULL: Given that the Prime Minister was too busy to speak to the Reserve Bank governor himself on the deposit guarantee matter, if it turns out that the Reserve Bank governor did not, in fact, expressly recommend an unlimited deposit guarantee, will he dismiss the Secretary of the Treasury for misleading the Cabinet.

KEVIN RUDD: In what has been a pretty interesting debate here in the Reps today, can I say that is the most irresponsible point I have heard made by the Leader of the Opposition.

Mr Speaker, the world currently confronts a global financial crisis. The Secretary of the Treasury is integral to this Government's, and preceding Government's, response to economic developments.

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The Prime Minister, as leader of the Government, I use this occasion to affirm 100 per cent this Government's confidence in the Secretary of the Treasury, and I would ask the leader of the Opposition to stand to his feet now and do the same.

MR SPEAKER: Order. Order. Order. Order.

MICHAEL BRISSENDEN: In the debate that followed Question Time Mr Turnbull did express support for the Treasury Secretary but continued to assert that either Dr Henry misrepresented the views of the Reserve Bank during the Cabinet discussions, or the Prime Minister is misrepresenting what Mr Henry told

the Cabinet.

Tomorrow the Opposition will have the opportunity to ask the man himself. Ken Henry is scheduled to appear before the Senate's Economics Committee.

KERRY O'BRIEN: And that will be interesting. Political editor Michael Brissenden.

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