The Australian government will provide a time-limited voluntary guarantee over state government borrowing, allowing states to readily structure their finance requirements to meet the long term infrastructure plans, Treasurer Wayne Swan said Wednesday.
The guarantee will be given for existing and new issuances of securities, but the scheme will not cover issuances denominated in foreign currencies. With regard to existing stocks, states should opt for such guarantee within 28 days. The guarantee will be available over a range of maturities.
After a meeting with state treasurers, Swan said in Canberra that pulling back on some critical infrastructure investment would result in slower growth and higher unemployment in the future. Also, global recession has hit state government bond markets, threatening the ability of state governments to deliver infrastructure projects.
In the face of the global recession, these critical nation-building infrastructure projects will support jobs, boost productivity and raise standard of living in the medium to long term. Considering these factors, the Rudd Government in consultation with the state and territory governments took this decisive action.
The Commonwealth will charge a fee for the use of the guarantee. For triple-A rating, the fee for new issuance will be 30 basis points and that for existing stock, it will be 15 basis points.
The fee for the purpose has been set based on historical experience of borrowing spreads and at a level, which provides an incentive for states to stop utilizing the guarantee when market conditions normalize. Swan said guarantee fee arrangements need to be reviewed on a continuous basis and revised if necessary.
The provision of a guarantee will raise the Commonwealth's contingent liabilities and this would be reflected in the Commonwealth's financial statements.
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