Prime Minister Kevin Rudd has extended the bank-deposit guarantee to non-banks, such as investment funds, to stem the flight of capital from the sector over the past fortnight.
The announcement last night came as Deutsche Bank warned that a Treasury ruling defining eligibility to meet the $1million guarantee threshold as ''per depositor, per institution'' could spawn a rash of sub-$1million deposits and seriously affect the ability of funds to raise money.
Investment fund Perpetual forecast yesterday that its profits might crash by as much as 27per cent this financial year, while BT Investment Management said the flight of capital could threaten its survival.
The Federal Government's move to encourage investment funds to access the guarantee marked a change from its position on Monday, which was to highlight the differences between banks and more risk-prone ''market-linked investments''.
The chairman of the Govern-ment's Future Fund, David Murray, said there was ''a market distortion caused by the guarantee'', and ''there could have been more thought given to how it was done''.
But Mr Rudd said the measures had been necessary to deal with the ''contagion'' on world markets.
''Confidence in our banking system was beginning to be called into question, and banking organisations began communicating their concerns to government.''
Former treasurer Peter Costello weighed into the debate yesterday, saying the Government needed to be ''very, very careful'' with Government guarantees.
''The point is this: the moment you guarantee one part of the financial sector, you are always going to put another part into disadvantage.''
The Australian sharemarket fell marginally yesterday, losing less than half a percentage point, while the Australian dollar lifted slightly to close at US61c after the Reserve Bank intervened.
Asian markets bounced back from the previous day's dives, as Tokyo rallied 6.41per cent and Hong Kong gained 11.3per cent.
A survey of Australian business conditions by the National Australia Bank showed one of the biggest quarterly falls in the past 20 years, falling 11 points to minus four in the September quarter.
NAB chief economist Alan Oster said yesterday, ''All three components of current business conditions deteriorated both sales and profits recorded double-digit declines to turn poor, while job gains moderated.''
The Government's capacity to meet its infrastructure commit-ments was called into question by the Future Fund chairman, who predicted drastic shortfalls in the Government's announced $40billion infrastructure funds as a result of the deteriorating economic conditions.
The Government announced in the budget a $20billion Building Australia Fund, an $11billion Education Investment Fund, and a $10billion Health and Hospitals Fund, but Mr Murray told ABC radio yesterday that half of the money required, $20billion, was dependent on next year's surplus.
''I don't know the timing, but on a cyclical basis there's no way those sort of surpluses will be available to any Australian government.
''The currency has fallen, commodity prices have fallen, the global economy is contracting quite noticeably.''
Yesterday, Treasury clarified the eligibility for the $1million deposit guarantee threshold, saying that ''the threshold applies per depositor per institution'', leading Deutsche Bank to warn that people or companies ''will be able to split their funds across multiple approved deposit-taking institutions to gain access to multiple fee-free thresholds.''