The news that yet another finance company will call on the taxpayers' deposit guarantee will have the Government grating its teeth.
This time it is Equitable Mortgages,a property mortgage lender that went into receivership last Friday leaving the Government with liabilities of $178 million under the guarantee.
The retail deposit guarantee was made in haste during the 2008 election campaign when banks were teetering around the world and their Governments were taking steps to avert a panic of withdrawals.
New Zealand banks were reported to be reasonably sound. Like their Australian parents, their investments had been cautious and they were not seriously exposed to the dubious debt instruments concocted on Wall St for "sub-prime" mortgages.
With other Governments, particularly Australia's, under-writing their banks' wholesale borrowing and retail deposits, New Zealand had to ensure its banks were not disadvantaged in raising funds. But why finance companies?
A large number had fallen over before the global finance crisis struck. After the property bubble burst in 2007, there was a string of collapses, all of them painful for small investors who had chased the highest interest rates on offer, forgetting that high risk was the other side of the same coin. None were compensated from the public purse.
When banks were given the guarantee late in 2008, the surviving finance companies were included for fear that without it they would be starved of funds. Yet despite it, four have now failed in the past six months.
The largest, South Canterbury Finance, has seen the Government pay out $1.6 billion to the company's mainly small and fiercely loyal depositors.
Far from enabling the non-bank deposit-taking business to survive, the guarantee may have induced it to take more risks.
At South Canterbury's collapse in August, chief executive Sandy Maier said the company suffered "a rush of blood" after getting the guarantee. He estimated that "somebody's idea of aggressive growth" had probably cost the taxpayer an extra $500 million or more.
The scheme should at least have charged fees high enough to make all institutions more cautious. Banks with deposits over $5 billion paid a rate that induced them to give up the guarantee when the original scheme expired on October 12. An extended scheme with more stringent conditions will run to the end of the year. Seven finance companies signed up for it.
Altogether the collapses have cost taxpayers $1.8 billion so far. The payout could reach $2 billion when investors in Equitable Mortgages have been compensated. It has become a significant contributor to the Budget deficit that will have to be reined in as the economy tries to gather strength.
The Government will be banking on recovering some of the costs of the guarantee in sales of assets of the collapsed companies.
The stronger the recovery, the better the sale prospects will be. The recovery has not been strengthened by $2 billion in bailouts. Had investors taken the losses, as so many had to do before the guarantee eventuated, the economy would be less burdened now and more robust.
The Reserve Bank reports that non-bank lending has declined 25 per cent over the past three years, mostly in the finance company sector. It expects the sector to recover on a wider range of investments.
Whatever happens, the guarantee should not be extended when it expires at the end of the year. Commercial banks no longer need it and finance companies no longer warrant it. They have cost the country enough.