KEY POINTS:
The string of finance company collapses was, according to some, going to result in a drying up of consumer credit heading into Christmas, hitting sales and dragging the economy into a serious tail-spin.
With investors spooked by the failure of high-profile firm Bridgecorp, finance companies' retail funding would dry up and they would curtail their lending; some would fail completely.
The knock-on effects would hit not only consumer spending but other areas of the economy such as property development and plant and equipment investment.
At least one prominent local fund manager said it was rearranging its portfolio to reduce its exposure to the New Zealand economy to dodge this downturn.
The first part of the story has played out. Retail debenture funding has nosedived and that contributed to the more than half a dozen other finance companies that followed Bridgecorp into oblivion, including Five Star Finance, the Retailers Association's preferred provider of hire purchase finance.
But a month away from Christmas there are few signs of desperation. Commentators acknowledge this year's sales will be unlikely to show the growth of recent years but there are a number of reasons for that other than the availability of consumer credit.
That's a far cry from the the gloomy predictions in September by the Shareholders Association's Bruce Sheppard.
With finance firms squeezed for cash and less money available for consumers, "big-ticket items such as cars and consumerables will crash", Sheppard said.
Christmas retail sales would plummet, manufacturers would discount prices and stop producing, and importers would 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 80s-style stagflation, high unemployment, double-deficit nasty real roadkill crash."
Kapiti Coast financial adviser Chris Lee said this week: "I think he's absolutely right."
Lee goes further, saying the global credit crisis is likely to reduce the availability of consumer credit even from the major banks.
"When you get lack of confidence you get tightening of credit."
But other commentators downplay the prospects of a credit shortage hitting Christmas sales.
They include the Retailers Association, which has an interest in maintaining confidence in the sector.
"I think that impact of the finance company issues is probably less dramatic than first thought," says association chief executive John Albertson.
He points out that the companies that have gone out of business were generally not big in the consumer finance area. And the impact of the Five Star failure on association members?
"Most of our people have worked through that and moved on."
In any case there are still firms around which can come up with the cash, such as overseas owned and funded giant GE Money.
Albertson says Christmas is more about gift trading rather than big-ticket items requiring finance.
"So again the likely impact is not likely to be huge."
The association expects December retail sales to be up about 5 per cent on last year, down on the 6 to 8 per cent growth in recent years but still solid enough.
Clothing retailer Postie Plus is predicting cautious spending, which is likely to lead to bargains for consumers.
Chief executive Ron Boskell said finance company closures combined with mortgage interest and high petrol prices had created tight trading conditions.
"I think most retailers will tell you that. The September quarter was down 5 per cent. It will improve later on."
Angus McNaughton is chief executive of Kiwi Property Income Trust, owner of New Zealand's largest mall at Sylvia Park, Mt Wellington. He says petrol prices and interest rates would affect trading, but Sylvia Park drew a lot of customers from the Waikato, which was enjoying the benefits of the dairy boom.
The Retailers Association's san-guine view is consistent with that of the Reserve Bank on the impact of the finance company situation.
This month the bank's deputy governor and head of financial stability, Grant Spencer, had this to say: "While these failures have clearly been an issue for individual debenture-holders, we do not see these developments as systemic in nature, either in terms of their impact on the broader financial system or in terms of their impact on the New Zealand economy.
"We see other institutions stepping in to take over the activity of those failed institutions, both on the liability and on the asset side of the business."
In terms of the retail sector's Christmas prospects, ANZ Bank chief economist Cameron Bagrie is somewhere in between the doomsayers and optimists.
While he believes there will be some marginal impact from the finance company issues, "there is a combination of bigger drivers".
Household income growth is healthy at present, as is the banking sector.
"But house price growth has slowed and is starting to tip back over, particularly at the lower end of the market, so you're not going to get the wealth effect.
"I think the big one going into Christmas will be the higher cost of food and petrol. Christmas at the moment is shaping up as pretty balanced in terms of what numbers come out. I suspect they'll be reasonably soft."
But while the balance of opinion seems to support the view that the finance company issues will not ruin retail sales over Christmas, Bagrie and others believe there is likely to be significant fallout later on and elsewhere in the economy.
"I don't think the retail-related stuff is going to be huge," says Bagrie.
"I think the impact here is going to be on the property market."
He talks of a "ripple effect" in the property market where the source of those ripples is the highly leveraged high-risk, high-return speculative end of the market which is largely funded by finance companies.
"Things go well there at the top of the asset price and credit cycles and drag the rest of the market up."
But the Reserve Bank's four interest rate increases and the domestic and international credit problems have resulted in a turn in the cycle.
"So the ability to find leverage for that pocket is now more difficult and if you can find it, it's more expensive.
"I think there'll be some ripple effect now in the other direction. It'll take some time to work through but the areas to watch will be apartments and the next leg will be sections.
"People might get forced to unload some assets, particularly in a number of section developments. That'll be a story for 2008."
Lee and McDouall Stuart analyst John Kidd, the author of a comprehensive report on the finance company sector, have similar concerns.
Says Lee: "If you've lent a developer $50 million to do a subdivision and he's not due to repay you for three years, are you going to lose your nerve along the way and tell him to refinance? Is he going to find anyone to refinance him?"
Kidd says his firm has identified the landbanking or pre-development end of the property market as a "specific area of risk" which some finance companies have lent against.
"Over the next couple of years, as you see easing or possibly declining land values, you've got higher interest costs and capital constrained issues for a number of lenders.
"You don't tend to see the stress against those sort of loans until it's very late in the process, because those are the ones where capital and interest just keeps being rolled forward."
The danger is that when the lender finally calls the loan in "suddenly it's distressed".
In its Financial Stability Report this month, the Reserve Bank similarly flagged property development as one of the higher risk areas of activity for finance companies.
But Spencer downplayed the risks there, too.
"If there are profitable investments to be made, the money will come forward, potentially from equity investors."
- additional reporting: John Drinnan
