Audrey Young: Too big to let fail... minister makes solid case for rescue

Finance Minister Bill English presented a solid case yesterday on why it is fair for the taxpayer to guarantee AMI and to fund a possible rescue package if it fails.

Stripped away to its bare essentials, it is that it is too big to fail.

The consequences would be too big, not for an incompetent company, but earthquake victims and taxpayers generally.

Labour and the Greens agreed that the Government had to act.

Jim Anderton and Sir Roger Douglas chimed in their support, but with Anderton extolling the virtues of Government involvement and Douglas warning about the moral hazards of it.

English is avoiding the ideology. His case is based on pragmatism.

AMI is especially too big in Canterbury to fail, having more than a third of the market.

A failure would affect 85,000 policy-holders there and, says English, uncertainty around AMI could have set back the rebuilding of Christchurch by two to three years.

Costs would then have ballooned - in that sense it can be argued that the Finance Minister is protecting the interests of the wider public purse.

But fairness does not necessarily mean consistency. The small number of domestic policy-holders from the small insurance company Western Pacific that failed this week will not experience the "fairness"of a Government bailout. It would be safe to assume that the Government would bail out Fonterra in the unlikely event of an emergency, but not the boutique dairy companies.

Similarly the victims who lost their savings in financial company collapses before the 2008 Government deposit guarantee scheme will feel no sense of fairness at the taxpayer bailout of South Canterbury Finance depositors who were covered by the scheme.

English was at pains yesterday to separate AMI and South Canterbury Finance. And they are very different. The shock in the Government books this week was that net cost to the taxpayer for SCF has increased from $900 million to $1.2 billion because the loan book was worse than expected.

It is possible with AMI that the Government will not have to pay a cent. The pact has been set up with strong incentives for AMI to avoid triggering the rescue package, because the moment it does, it surrenders ownership. That is also a disincentive for other companies to turn up with the begging bowl. Again it means surrendering ownership.

Big bailouts change people's thinking. English is now walking a fine line in the lead-up to his May 19 Budget of needing to build his case for his promised austerity without actually sending public confidence into a deeper funk than it is in.

The fact that the Government knew on Wednesday it could be forking out $1 billion for AMI may have been why it wasn't too fussed about $2 million being spent on the waka.

From the Government's perspective, it may have been small beans. To some taxpayers, it now makes it even more unforgivable.

English received a polite hearing from Labour, the Greens and United Future. If he was expecting any sympathy from Act, he would be disappointed. With party leader Rodney Hide away, it fell to Douglas, the former reforming finance minister, and he laid it on with salt.

"The way the Minister of Finance has run the economy after the past 2 years and the risk that he has been prepared to take is no different in any way to the way AMI has run its business. They both live at the edge of financial ruin."

English knows that it is not always fair in politics.