Don't touch the guarantee

The government should resist pressure to change the guarantee on wholesale bank funding, according to the head of debt capital markets at a leading investment bank.

A director in capital market origination at Citi, David Bailey, said arguments that the government should make changes to remove anomalies arising from its guarantee or tilt the playing field to help certain groups ignored the big picture.

Bailey said: "The issue we face, as our long-running current account deficit shows, is that Australia relies on foreign borrowing.

"Australian banks could not raise enough locally to meet their funding needs. They have to go offshore and when they do they are competing with US banks that are supported by guarantees and UK banks that are supported by guarantees.

"While that situation goes on there should not be any change to our guarantee arrangements."

Investment banks' debt capital markets teams enjoyed a bumper March quarter, with domestic and international corporate bond issuance up strongly.

According to Bloomberg's March quarter capital markets league tables, international bond issuance of US$31.6 billion was up more than 150 per cent on the March quarter last year and well up on the US$12.4 billion issued in the December quarter.

Domestic bond issuance of $24.2 billion in the March quarter was up 24 per cent on the same period last year and was almost double the issuance in the December quarter.

Bailey said international issuance was dominated by the financial services sector, which accounted for 76 per cent of activity. Financials accounted for 98 per cent of Australian domestic issuance.

Citi was the leader in arranging international issues, with 15 deals worth US$4.7 billion giving it a 15 per cent share. Citi was followed by TD Securities, with eight deals and an 11.6 per cent share, and HSBC, with six deals and an 8.9 per cent share.

In the domestic market the big banks dominated as self-led arrangers of their own transactions.

Bailey said the banks have had the benefit of the government guarantee but they have also reaped the rewards of working hard to develop strong relationships with offshore investors over the years.

"They have shown that they are good at working with their advisers and managing those relationships well. Westpac and ANZ have done samurai issues this year and Suncorp did a sterling transaction."

He said financial sector issuance would come off in the June quarter. The banks have done the bulk of their funding for 2009.

He expects to see activity continuing from the non-financial sector, following sizeable deals by Woodside, Westfield and BHP.

But the real action may come from the government sector. "It is a trend we have seen overseas and we are already seeing it with the states here.

"Governments are chewing through their surpluses. If you assume that governments are going to be injecting money into the economy for the foreseeable future then there will be a role for us helping them out."