A related issue that has been around for a few weeks now, but came to the fore late last week, is the perception that the state governments are going to be unable to compete against Federal government guaranteed banks when it comes to raising funds for their various infrastructure projects and other funding needs. Perception may be the operative word here, rather than reality. Treasury Corporation Victoria raised $500 million a couple of weeks ago for 11 years. Admittedly, it had to pay a spread over swap to do this, when in the past it would have paid something less than swap. But no bank could have competed with that in the domestic market two weeks ago (or now for that matter). Credit spreads on state government bonds have been widening pretty much since the federal government introduced its guarantee on bank deposits but not because investors don't want to hold state government debt. Mums and Dads do not hold state government bonds; it is the fund managers or institutional investors that marshal the funds of mums and dads that hold state government bonds. Institutional investors have sold these bonds as mums and dads have redeemed their investments, but only because the bonds are among their most liquid assets and therefore the easiest to sell.Proposals now being put forward for the federal government to establish an infrastructure bank which would fund the states' infrastructure borrowing needs seem misguided. The federal government is making it clear that it does not want to borrow in its own right to do this, and as such, an infrastructure bank would have to be established as a stand alone entity whose liabilities would not appear on the government's balance sheet.If this is the approach taken, the infrastructure bank would raise funds as a government guaranteed bank, no different from the position all the other banks. Thus the infrastructure bank would be competing directly with the Australian banks and have no funding advantage.It seems that the states would be better off continuing to fund themselves as they always have and remember that they have some advantages. The first is that the states generally like to issue long-term debt and infrastructure funding certainly requires this. The banks rarely issue for longer than five years. To this extent, each appeals to different types of investors. Similarly, bonds issued by the states go into the government and agency bond indices, and therefore attract a particular type of investor at much finer credit spreads. This is the reason that the French government agency, Societe de Financement de l'Economie Francaise, which was established to provide loans to the French banks, has been able to issue €11.0 billion of bonds in recent weeks of spreads around only five basis points to mid-swaps for three-year funding.Thirdly, the federal government has just passed the legislation to abolish interest withholding tax on foreign investors who buy domestically issued state government debt. This will make it easier to raise larger volumes of funds in the domestic