Rudd lends life to sick market

Jennifer Hewett, National affairs correspondent


THE Rudd Government knows how tough life is going to be for voters this year as unemployment rises.But it also knows that job losses at companies such as BHP and David Jones and collapses of companies such as Australian Discount Retail are merely the symptoms of the malaise. The deeper cause is rooted in the banking system and particularly the availability of credit for business. Without a steady and reliable funding flow, the whole economy seizes up. No economic stimulus packages can work effectively if there is not enough credit to go around. This is an international problem, but its impact will reverberate throughout Australia, particularly if Australian corporates can't get the refinancing they need.

Australian banks have been warning the Government they will not be able to meet the financing shortfall likely to occur once many of the foreign banks withdraw from the local market. In response, the Government is planning to establish a special facility - supposedly temporary - that would effectively mean the Government is lender of last resort. This would be half funded by the Government and half by the big four banks.

It is an extraordinary proposal for extraordinary times. Many in the market are deeply uneasy at the prospect of the Government being in the business of direct lending to the corporate sector. Some see it more as a clever way for profitable Australian banks to get rid of dubious loans, particularly in the property market, from their balance sheets. They warn that the Government will end up carrying the cost of bad investments or temporarily propping up sectors where values must inevitably fall. But having seen the failures of the market, the Government is not prepared to take the risk of not doing enough. It has been convinced that standing back would lead to a vicious circle of falling asset values leading to more collapses and more reluctance to lend. This is why Kevin Rudd has been emphasising that the withdrawal of foreign bank lending and the tightening in domestic bank lending are hurting the real economy. "If banks do not allow clients to refinance as they would in normal conditions, then companies can be forced to sell assets, often at low value," the Prime Minister said this week. The Government will now present this proposal as another example of the action the Government is prepared to take to protect Australian interests. And given the even more radical measures being taken in Britain and the US - and a new phase of turmoil in the global banking sector - Australian
voters will probably give it a tick. At least for now.


Source

To evaluate the economic today many companies are close because of the economic global crisis and also many people are unemployed because of that the market today are sick.