Investors Saved by the Taxpayers

This week, the Crown Guarantee has been severely tested with the receivership of South Canterbury Finance. No one will know the final cost to the tax payer until the receivership is completed. This is likely to take years, as the Government will not want to put undue pressure on borrowers who most likely are already under significant financial stress.

It was inevitable the moment it was announced that the Crown Guarantee was going to apply to finance companies which were supposedly solvent at the time that there would be a day of reckoning. What it achieved was simply to delay the collapse of most of the finance companies. It also removed the losses from the investors to the tax payers as whole.

There is no doubt that the Crown Guarantee provided stability to the banking system at a time when that was desperately required. The banks have had to pay for that cost. The good thing for the country as a whole is that banks do not have to borrow as much off- shore, as New Zealanders have been increasingly inclined to keep deposits in the bank. The appeal of what had been higher interest rates offered by finance companies has gone.

Investment incentives have unfortunate consequences. The Crown Guarantee on finance company debentures is an example of that. Why should a higher risk deposit, be effectively afforded the same credit rating that the Crown has? Philosophically why should the tax payer as a whole have to guarantee repayment and interest to a select group of investors? The 1.5 billion dollars or so that the Crown Guarantee has cost the tax payer so far may have been more beneficial to society as a whole if it were invested into say the Super Fund.

Perversely the Crown Guarantee may be a negative for the property market. Investors may be looking more at the sure return that a Bank deposit provides relative to the vagaries of the property market. This in itself is unusual. Property prices have fallen so could be seen to be at “sale pricing”. Interest rates are low, and by the time tax has been paid, the return for the investor is minimal and that is before inflation is taken into account.

The capital markets may also have been negatively impacted by the Crown Guarantee. Again investors see bank deposits as the safe haven, and have been avoiding the vagaries of share markets and managed funds. Anecdotal evidence suggests that the bulk of the fund inflows is via KiwiSaver. There is also an element of switching between fund managers.

The demise of South Canterbury Finance may see some stimulus for non finance company investment. The debenture holders will most likely get paid out within a few weeks, once the trustee has received confirmations of investor holdings.

From the sidelines it seems that the Hubbard Empire and Hubbard himself has a lot of support. This may largely disappear once the cost to the taxpayer is quantified. This most likely will be the largest failure by a privately owned company in New Zealand.