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South Canterbury Finance got itself into trouble by lending money to people who couldn't pay it back and on assets that have no value, with many of the loans now bonfire material, Prime Minister John Key said today.
The Government paid out $30 million to $40 million to cover deposits by foreigners that it legally did not have to, he said.
It did that to be the sole creditor of South Canterbury's receivership, he said.
"The receiver ultimately controls those assets...but does so at the direction of the Government," Mr Key said.
That will allow the Government to prevent fire sales of South Canterbury's assets.
"Without that, we would be in the position of being the 800-pound gorilla who would have to take marching orders from a mouse and we don't want to do that."
It paid out immediately to avoid having to pay interest to those covered by the guarantee.
Another company may buy SCF loans
Some of the loans owed to South Canterbury Finance were likely to be a write-off but it was possible another company would buy all of them, Mr Key said.
There had been approaches about that.
"They lent money to people who no longer can repay it or on assets that no longer have any value...that's the same position that other finance companies found themselves in."
Many of the loans were "bonfire material".
However, New Zealand banks and finance companies would not have been able to raise capital without the government guarantee, Mr Key said.
"There are some people who've invested in other finance companies, like Hanover, and have lost their money and yet they'll see others that are covered by South Canterbury Finance."
They may see a degree of unfairness but it was necessary to help the New Zealand finance sector, he said.
Treasury was confident the Government would have enough money left over to pay out other guarantees if further finance companies collapsed, he said.
Labour blames Govt's failure to create economic recovery
Labour leader Phil Goff said the need to spend more than $1.6 billion paying out South Canterbury Finance investors was the result of a lack of the Government's ability to create an economic recovery.
The retail deposit guarantee scheme was put in place by Labour at the height of the financial crisis, Mr Goff said.
"(The Government) had no choice but to apply the deposit in the end. The real thing that we needed was a fence at the top of the cliff.
"What we've had is, after the financial crisis is over, the continuing collapse of companies in an economy where there has been no real recovery."
South Canterbury had problems but if they had occurred in a good economy, other companies may have been willing to put up financing, Mr Goff said.
There was the possibility South Canterbury would have ended up in receivership anyway, but it would have had better prospects in a better economy, he said.
Credit rating stable
Although the South Canterbury takeover brought down the New Zealand dollar this morning, the country's credit rating remains stable.
The NZ dollar fell half a cent against the greenback when the receivership was announced and failed to claw its way back later in the day.
But Radio New Zealand reported that credit ratings agencies Fitch Ratings and Standard & Poor's both kept New Zealand's credit rating stable.
Finance Minister Bill English said the Government has acted quickly to ensure minimal disruption to the economy.
Mrs Hubbard speaks out
Meanwhile, Allan Hubbard's wife Margaret told Radio New Zealand today had been a struggle.
Mrs Hubbard was reluctant to talk following the news the company had gone into receivership, but said she and her husband were grateful of the support from their community.
"There's no way we could thank everyone. We've had so many letters, cards, phone messages, gifts of money, food, flowers, everything you can think of," she told Radio New Zealand.
Mrs Hubbard said the news of the company's fate was upsetting.
"We're feeling depressed ourselves, more than we were."
- NZPA, NZ Herald staff
