Australian govt bank debt guarantee no silver bullet

SYDNEY, Oct 13 (Reuters) - Australia's plans to guarantee debt issued by the country's banks was welcomed by industry groups but insiders doubt the measure alone will be enough to bring down funding costs.

Australia announced the guarantee on Sunday, following similar moves by other nations, such as Britain, Germany and Ireland in recent days.

'This action by the Australian government is a very significant part of the global action to restore confidence in the financial system,' said Grant Lovett, head of fixed interest at UBS in Sydney.

Australian top banks are among the world's most profitable and highest rated banks, yet since the global credit crisis, their funding costs have soared as investors stopped buying debt issues or asked for higher risk premiums.

Before the crisis, Australian major banks, all rated double A, used to pay around 10 basis points over the bank bill swap rate for three years. They now have to pay 100 basis points.

But the blanket guarantee on new and existing debt issued by Australian banks, is unlikely to see investors rushing to buy their now triple A rated bonds, thus reducing their cost of funding.

'Until people see the U.S. getting rid of its bad assets, no one is suddenly going to start buying (Australian) debt or start to be comfortable with (Australian) banks,' said Craig Saalmann, credit strategist at JPMorgan.

Investors are still sitting tight on their cash.

'This guarantee does not suddenly ensure that the global situation is fixed overnight, it's not going to increase my appetite to suddenly invest term monies with a bank,' said Michael Costa, treasurer at government-owned Export Finance Insurance Corp in Sydney.

'I want to be liquid,' he added.

Australia's major banks have around A$100 billion Australian dollars ($66.23 billion) in combined annual funding requirements with more than 80 percent sourced in international bond markets.

'It's a sentiment game, investors are still sidelined,' said a banker who asked not to be named because he is not authorised to speak to the media.

($1=1.51 Australian dollars)

(Reporting by Cecile Lefort; Editing by Tomasz Janowski) . nt COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.