Earthquake could cost economy $16b

Christchurch's devastating earthquake may cost $16 billion and trigger a fall in the cost of money by half a per cent 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 per cent at its monetary policy statement on March 10, and would not raise the rate again until 2012.
JP Morgan estimated the earthquake would cost US$12 billion ($16 billion), Reuters reported. This was much higher than the US$6 billion cost of the Christchurch September 4 earthquake and second only to the US$20.3 billion 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 Tuesday's 6.3 magnitude earthquake could cost, but Mr Key would not rule out estimates as high as $16 billion.
No one was in a position to assess the cost, Mr Key warned.
He said the Earthquake Commission (EQC) would treat this 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 $1.5 billion to cover the cost of claims for damage to residential properties. The next $2.5 billion would be covered by "reinsurance" overseas and the outstanding balance would be covered by private insurance companies or the Government.