Christchurch Earthquake could cost $16b, trigger interest rate fall

Christchurch's devastating earthquake may cost $NZ16 billion and trigger a fall in the cost of money by half a percent as authorities make sure the earthquake does not crush the national economy.
Prime Minister John Key and Finance Minister Bill English said the Government can absorb the cost of the earthquake, and credit rating agency Moody's Investors Service said there was no need to reconsider the country's Aaa credit rating.
Westpac came out with a bold prediction that the Reserve Bank of New Zealand (RBNZ) would slash the official cash rate by 50 basis points to 2.5 percent at its monetary policy statement on March 10, and would not raise the rate again until 2012.
JP Morgan estimated the earthquake would cost $US12b, Reuters reported. This was much higher than the $US6b cost of the Christchurch September 4 earthquake and second only to the $US20.3b cost of the Northridge earthquake in the United States in 1994.
``The full economic toll of the earthquake is unknown at this stage,'' Westpac said.
``But it is immediately clear that the disruption to activity will be greater, and longer lasting, than following the September earthquake. On top of this, the impact on confidence is likely to be much greater and will be felt at a national level.''
The RBNZ may cut interest rates when it had been expected to raise them later this year.
The Government will have to borrow more money to cover the costs of the earthquake, but it did not expect the country's credit rating to be downgraded, Mr English said.
``It is a setback but we can handle it. These are bigger costs, but we are in a sound enough position to handle it,'' he said. ``Our economy is fundamentally sound. This is another knock, but we can take it.''
The Government would not give details on how much the damage from yesterday's 6.3 magnitude earthquake could cost, but Mr Key would not rule out estimates as high as $NZ16b.
No one was in a position to assess the cost, Mr Key warned.
He said the Earthquake Commission (EQC) would treat yesterday's quake as a separate event to the September 4 one, and he expected the commission to receive another 100,000 claims.
EQC would pay out the first $1.5b to cover the cost of claims for damage to residential properties. The next $2.5b would be covered by ``reinsurance'' overseas and the outstanding balance would be covered by private insurance companies or the Government.
``Obviously that is a significant dent in both the resources of EQC, and a significant impact on the reinsurers to the tune of $5b,'' Mr Key said.
BNZ head of research Stephen Toplis said trying to estimate the economic impact of quake at this stage was foolish.
``The biggest disservice you can do anybody at the moment is make a stupid estimate of the dollar value of this.
``We're no better placed than anybody else to try and quantify the magnitude,'' he told NZPA.
However, the economic toll would be far bigger than the impact of September's magnitude 7.1 quake.
``How many businesses in Christchurch, that were just about to get back on their feet again, have now suffered an impact that, in some cases, could be fatal?''
This time, there was also a more severe psychological impact, due to the rising death and injury toll, on top of the more tangible economic implications.
Mr Toplis said the region's full recovery would take years if not decades.
Christchurch represented about 15 percent of the nation's economy.
``So, we do know from a numerical sense that 15 percent of the New Zealand economy has now stopped,'' he said.
Due to New Zealand's small size, the whole country would be affected.
ASB chief economist Nick Tuffley told NZPA tourism would also take a big hit, as Christchurch was the gateway to the South Island, with the second biggest international airport in the country.
The Rugby World Cup would have given the region's economy a much-needed boost but whether games would still be held in the city was up in the air.