By Steve Painter

Six of Australia's largest banks and insurance companies stood close to crisis on July 23 as the federal government bailed them out with special legislation immediately freezing withdrawals from several property trusts. The trusts are heavily involved in commercial property investments whose value has collapsed.

Between $2 and $3.5 billion is tied up in the trusts which, although formally independent, are all linked with banks or life insurance companies, including Advance Bank, Westpac, ANZ, BT Australia, National Mutual Life and AMP.

While the trusts could have gone to their investors with a proposal for a freeze, they persuaded the government to act because rejection of such proposals could have sparked a run of investors withdrawing their funds.

A run would have forced the trusts to sell property, risking an even deeper property market crash. This, in turn, would have hit the parent companies with heavy losses, as they have been buying into the trusts to cover withdrawals of up to $1 million daily by investors. Withdrawals have been rising steadily since March, when they stood around $400,000 daily. The trusts began asking for a government freeze in April.

The trusts, which are not listed on the stock market, sought investment on the understanding that funds could be withdrawn on notice of between seven and 60 days. Now investors will have to wait at least a year unless they can prove financial hardship or other special circumstances. It is believed superannuation and other retirement funds are among the frozen investments.

The trusts have long-term problems due to their heavy involvement in the commercial property market during the speculation boom of the '80s. Their immediate difficulties are due to a rash of forced and mortgagee property sales, which are driving down commercial property prices.

They are hoping to minimise asset sales in the depths of the property slump, and to hold sales until the market recovers. Some of the trusts' assets will almost certainly be sold at a loss, as it could take years for property prices to recover, let alone reach the heights they did in the boom.

The July 23 freeze is the second in this sector. Around $5 billion has been frozen in non-bank trusts since July 1990 with the approval of investors. The latest freeze may simply delay the problems of the trusts, as there is no certainty there won't be a run in 12 months, when it expires.

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