John Armstrong on politics

John Armstrong is the Herald's chief political commentator

John Armstrong: Key walks a tightrope over ailing finance firm

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John Armstrong writes that John Key must reassure investors that their cash is safe, while minimising the taxpayers' burden.

Finance Minister Bill English (right), with Prime Minister John Key. Photo / Mark Mitchell
Finance Minister Bill English (right), with Prime Minister John Key. Photo / Mark Mitchell

Better to begin the damage control before the event rather than having to pick up the pieces afterwards.

The Prime Minister took that motto to heart yesterday, using his weekly press conference to lay out the Government's objectives in assisting ailing South Canterbury Finance, but without disclosing exactly what will be announced today with regard to the Timaru-based company's future (or lack of future).

One way or the other, taxpayers may well have to come to the party, either through a hefty cash injection to enable a recapitalisation and restructuring of the finance house or a huge payout to the 20,000 investors under the Government's retail deposit guarantee scheme if it collapses and goes into receivership.

In what is a tricky balancing act, John Key has to both reassure investors in South Canterbury Finance that their money is safe, while assuring taxpayers that every step will be taken to "minimise the cost" of any bailout or payout.

A bailout would set a precedent for a government helping a private company. While the last Labour Government came to Air New Zealand's rescue, that was a "strategic" decision driven by the need to maintain services and routes for New Zealand exporters.

The other relatively recent case is the bailout of the old Bank of New Zealand in 1990. However, the BNZ was only partly privatised at that stage.

Key knows a lot of taxpayers are going to be asking why their hard-earned dollars - potentially up to $650 million - are going to be distributed to investors who took a risk but will end up not only getting their money back but the interest on that money at the rates that South Canterbury Finance was offering when they made their deposits.

Investors in other failed finance companies will be grumbling they got no such protection, and that South Canterbury Finance was simply lucky to have still been afloat when the deposit guarantee scheme was put in place during the turmoil in world financial markets.

They will not be thinking that in Timaru, however. A collapse of South Canterbury Finance could have major negative consequences for the city's economy and the rural hinterland in terms of access to capital and forced sales of farms and other assets.

Feelings are already running high over the manner in which Allan Hubbard, the founder and former chairman of South Canterbury Finance, has been treated by Government agencies.

It does not matter in political terms that much of that protest, though genuinely felt, is misguided. Timaru is the kind of swing-vote provincial territory National must hang onto to win next year's election.

Little wonder, then, that Bill English thought better of heading off on a scheduled overseas trip last night and decided circumstances demanded he remain at home. The Finance Minister frequently warns of "bumps on the road to economic recovery". South Canterbury Finance is making for a very jolty ride for National.

- NZ Herald

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