Brian Fallow: Positives glint amid rubble of SCF demise

Finance Minister Bill English was at pains to stress yesterday the need to avoid a fire sale of assets. Photo / Brett Phibbs

Minimising disruption to the economy is one of the Government's declared objectives in the South Canterbury Finance affair.

Finance Minister Bill English was at pains to stress yesterday the need to avoid a fire sale of assets.

It is why the Government has taken a generous construction of its obligations under the deposit guarantee scheme and has moved to ensure that it is the only creditor whose interests the receivers have to serve.

The Government's shoulders are broader and its capital more patient than those of South Canterbury's existing funders.

With the economy in general, and rural property market in particular, in their present delicate state, a fire sale is in nobody's interests.

A receivership with the Crown as the sole creditor also avoids the pressure to call in existing good loans and force borrowers who are meeting their commitments to refinance.

The collapse of a financial institution of South Canterbury's size is unambiguously bad for business and investor confidence, already weak.

But it is no Armageddon.

Its loan book represents little more than 1 per cent of $120 billion worth of lending to the business and agricultural sectors.

And the payout of $1.6 billion to depositors over the next month or so constitutes an unintended additional fiscal stimulus.

They will have the option of spending it (at a time when the recovery has hit a soft patch) or saving it. In the latter case it is likely to be in institutions which are actually making fresh loans, something South Canterbury has not been doing for a year.

Also on the positive side of the ledger, for borrowers at least, is the fact that it has probably put paid to any chance the Reserve Bank will raise interest rates on September 16.

The expected net loss to the Crown is around $600 million - with some downside risk, English conceded, and not counting interest on the additional debt it will have to service.

But that is less than has been provided for already in the Crown accounts for losses under the deposit guarantee scheme, so the country's credit rating should not be affected.

The losers in all this - apart, appropriately, from the company's shareholders - are the taxpayers.

So what do we get for our $600 million (plus)? We have already got it.

It is the benefit to the economy as a whole of setting up the deposit guarantee scheme in the darkest days of the global financial crisis two years ago.

It was instituted, by the previous Government but with National's agreement, in order to avoid meltdown of the financial system, English said.

"We were looking at runs on banks and serious financial instability."

Compared with such a counterfactual, or with the cost of finance sector bailouts in the Northern Hemisphere, this is a bargain.