Declaring the global financial crisis had entered a new and dangerous phase, Kevin Rudd said his Government would guarantee the estimated $700 billion that Australians have deposited in banks, credit unions and building societies.
After a two-day emergency meeting in Canberra, the Prime Minister yesterday also guaranteed all the money the banks borrowed, to ensure overseas banks would continue to lend them money. The guarantees were effective immediately.
Mr Rudd doubled from $4 billion to $8 billion the amount the Government will spend on residential mortgage-backed securities.
This will ensure small banks and non-bank lenders a continuing pool of funds.
"We are in the economic equivalent of a rolling national security crisis and the challenges are great," he said.
With the crisis now affecting the "real economy", Mr Rudd said it was vital to keep the economy growing.
If necessary, the Government would spend the $20 billion budget surplus to ensure all policies made before the election and in the May budget were implemented.
Mr Rudd said the surplus was created as a buffer for the future.
"Well, the future is here," he said.
He also warned that forecasts in the budget and, more recently, by the International Monetary Fund, for slower growth and a rise in unemployment, had underestimated the impact of the crisis.
"Unemployment is likely to be higher than what has been projected."
The budget forecast unemployment, now 4.3pc, to hit 4.75pc. The IMF forecast 4.9pc.
"This global financial crisis has entered a new and dangerous phase with real consequences for growth, for jobs and therefore for the future," Mr Rudd said.
The savings deposit guarantee would be reviewed after three years and banks would be made to pay the government insurance to guard against so-called "moral hazard" - banks embarking on risky behaviour, safe in the knowledge they would be bailed out.
The Government intended originally to guarantee deposit accounts of up to $20,000 while the Opposition had demanded a $100,000 limit.
Mr Rudd said the assurance was to prevent a run on the banks.
Depositors were nervous "given the events they are seeing on their TV screens each night".
He reiterated that Australia's banks were the safest and best regulated in the world, none was in trouble and the guarantee would never be called upon.
Mr Rudd said the decision to underwrite the money the banks borrowed was not a sign of instability but a recognition that overseas institutions were lending only to banks with such guarantees.
"I will not stand idly by while Australian banks are disadvantaged in international credit marketplaces because of the actions taken by foreign governments," he said.
"We must act now because other governments with weaker banks have moved to make those institutions more competitive than our stronger banks."
The Opposition Leader, Malcolm Turnbull, supported the measures.
As the meeting went ahead in Canberra, the Treasurer, Wayne Swan, finished a hectic trip to the US with a late-night meeting of the G20 in Washington.
That gathering committed itself to using "all the economic and financial tools to ensure the stability of financial markets".
European leaders were due to meet overnight at a hastily convened summit in Paris to outline details of their individual plans to help banks raise capital.
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