Oct. 19 (Bloomberg) -- Government efforts to rescue the global financial banking system have left the world with the “ultimate moral hazard problem,” said Ian Macfarlane, former governor of Australia’s central bank.

“We resolved the short-term problem by saying the taxpayer will fund systemically important” institutions, Macfarlane told a function organized by the Lowy Institute for International Policy in Sydney today. “It’s left us with the ultimate moral hazard problem.”

Macfarlane, who headed the Reserve Bank of Australia between 1996 and 2006, also said the global economy has probably “bottomed.” Australia’s resilience was helped by the nation’s banking system, which avoided the losses seen abroad, he added.

“We should give the Australian financial market more credit” for surviving the global crisis in its own right, Macfarlane said. “We really have come through this in remarkable shape.”

The former governor also said that while it was “disappointing” that public guarantees on bank deposits were introduced last year following the collapse of Lehman Brothers Holdings Inc., the government had no alternative.

“Everyone else in the world did it,” he said. “You couldn’t have Australian banks excluded from markets that dodgy British and American banks could access.”

Macfarlane also said he hoped the guarantees were removed “reasonably soon.”

Economic Challenges

Australia’s economy faces challenges including balancing the impact of a surge in business investment, inflation and the nation’s currency, Macfarlane said.

“We have by international standards a very modest output gap,” he said. “We have a rate of inflation which hasn’t fallen in underlying terms by as much as we might have expected” during an economic downturn.

Macfarlane said the nation’s economy is currently being held up around the world as a model survivor of the global crisis. His successor, Glenn Stevens, this month became the world’s first Group of 20 central bank chief to raise borrowing costs since the height of the financial meltdown.

“I think we have done remarkably well,” Macfarlane said. “This has led to a most unusual situation where we seem to be the absolute player of the month in financial markets.

“I’ve never seen a situation where the Australian economy has been held up to such praise. That makes me worried -- success can be hard to handle.”

To contact the reporter for this story: Jacob Greber in Sydney at jgreber@bloomberg.net

Last Updated: October 19, 2009 04:36 EDT