KEY POINTS:
The collapse of Five Star Consumer Finance has raised the spectre of a credit squeeze undermining Christmas retail spending, which doomsayers say could drag New Zealand into an economic whirlpool.
But there is an alternative view, that the main impact of the finance sector collapse will be a consolidation of the consumer credit market, with little effect on retail spending.
The theory is that banks and big finance companies like GE Money and Fisher & Paykel Finance will pick up the slack if there are any more collapses by the finance companies that help underpin the retail sector.
Shareholders Association president Bruce Sheppard is one of the doomsayers. He says New Zealand's retail sector and domestic economy is built on high-risk debt.
More finance company collapses will reduce the sale of big ticket consumer items such as plasma screen televisions and lounge suites.
This week Sheppard donned a sandwich board - figuratively speaking - and declared a credit squeeze in the retail sector would bring on a recession. The end, he suggests, is almost certainly nigh.
The remaining finance companies are building cash reserves so they can be prepared for a falloff of renewals once investors - spooked by the collapses - exit the market.
In these circumstances finance companies will be setting aside more cash than they have in the past to ensure that their loans are covered by reserves and they remain liquid. That will mean less money available for customers.
"Big-ticket items such as cars and consumerables will crash," said Sheppard. "Retailers should now be reviewing their forward orders of stock for Christmas.
"Manufacturers will do what they can to discount prices, factories will have to stop producing, importers will be caught with excess stock.
"It will not take much when we are so heavily in debt to bring a major recession. We are headed for a late eighties-style stagflation high unemployment double deficit nasty real roadkill crash."
Understandably retailers - who rely on consumer confidence - do not have such an apocalyptic view.
Retailers Association chief executive John Albertson insisted that other finance companies such as the dominant players GE Money and Fisher & Paykel Finance would cover the loss of smaller finance firms.
Briscoes Group chief executive Rod Duke agreed.
He said none that the big retailers he knows of are exposed to second- and third-tier HP companies.
"I don't dismiss what Bruce says - he is right about 30-50 per cent of the time - but I don't see it," Duke said.
Mastercard New Zealand country manager Stuart McKinlay says it's possible that credit card debt could increase.
"But I don't think we are talking about a credit squeeze. I think the economy is in good shape with low unemployment and a lot of people with incomes."
The two companies that might be poised to pick up any slack - Fisher & Paykel Finance and GE Money - already dominate the sector.
GE Money is a division of the giant multinational General Electric and that has expanded through acquisitions over the past three years.
Indeed, New Zealand general manager Greg White says the company is looking at marketing itself as sourcing its cash from the GE Treasury offshore - promoting it as a stable finance partner.
"I am not happy that this is happening but it is not surprising when there are a hundred finance companies in New Zealand for 4.3 million population," he says. "When a couple of finance companies fall over then the flags go up from government financial services reform."
Consumer credit was affected by standard issues such as the Reserve Bank increases to the Official Cash Rate.
Forsyth Barr retail analyst Guy Hallwright also doubted finance company collapses would have a direct effect.
"Only some smaller retailers at the lower end of spectrum, in some of the downmarket areas [would be affected]. Some with bad credit risks might have to pull their horns in a bit," he said.
He doubted that there would be any change to the promotional pitches such as "interest-free finance" that are a high-profile part of the retail sector marketing.
"The reality is nothing is interest-free - you pay the the price they ask which incorporates a cost for the credit. It is just basically a higher price up front."
The other question will be over interest rates and whether any reduction in the amount of finance company money might increase rates.
However it's not clear that any interest rate rise for consumers to account for a shortage of money would have a direct impact on retail sales.
But Mastercard's McKinlay said many consumers were not concerned about interest rates and the cost of money.
"That is an appreciable part of the market," he said.
