Finance Minister Bill English has ruled out a bailout for struggling dairy farmers after Labour leader Andrew Little said the Government should consider emergency relief similar to that available for droughts.
Little has also called on the Government to "stiff arm" the banks to ensure farmers are not forced off their land because they cannot keep up mortgage payments after the latest slump in milk prices.
"They need to lean on banks and lean on Fonterra. The conditions have emerged now where there are significant risks not only to farmers and Fonterra but actually to the prospect even more productive land could fall into foreign hands."
Little's comments come after Fonterra dropped its forecast milk payout to $3.90 a kilogram last week - the 'severe' zone under Treasury's forecasts. In an interview with the Herald, Reserve Bank Governor Graeme Wheeler said its worst case scenario was that farm prices could fall by up to 40 per cent and banks have to write off up to 15 per cent of the $40 billion in loans if dairy prices did not lift within three years.
English told TVNZ's Q+A yesterday that he doubted that would be a threat to the financial stability of the country, banks were stronger than at the time of the global financial crisis and the Government would not step in with any bailout for farmers.
"A few billion in losses is not a threat to financial stability. The regime that's in place now means the banks are stronger than they've ever been with a greater ability to withstand those losses than they've ever had."
He said there was a system for dealing with extreme hardship "because you are going to see, for a small number of dairy farming families, some real distress. But we're not going to be bailing them out."
But Little said some farmers were effectively now working for nothing and the Government could set up similar emergency provisions to those it uses in cases of drought or other 'adverse events'.
"If the farms in the long term are productive we want to keep them viable. If there are circumstances where a farmer has continued to make reckless decisions and the situation of the farm is not just a consequence of the low dairy payout then you might have less sympathy for that. But where you've got good farmers with good efficient farms then it makes sense to keep farmers like that on the land."
Help for farmers can include tax relief and Rural Assistance Payments for families.
Little said the Government should also call a crisis summit of farmers, Fonterra and the banks to hammer out a way to ride through the hard times. Mr English dismissed that as a "talkfest" and said supporting the Trans Pacific Partnership would be more worthwhile.
The Reserve Bank will this week release stress tests it has done with five major rural lending banks - ANZ, BNZ, Rabobank, Westpac and ASB.
The Reserve Bank's worst case scenario - if dairy prices stay low for three years:
• Farm prices down 40 per cent
• Banks write off 15 per cent of sector loans