KEY POINTS:
While painful for investors, the impact of recent finance company collapses on the wider economy should mostly be limited to a short-term hit to general confidence which will quickly be swept aside by the dairy boom, Westpac economists say.
The seven failures over the past 16 months have
prompted warnings that the economy could suffer as a result of investor losses and as funding for sectors such as property development and consumer finance dries up.
But Goldman Sachs JBWere economist Shamubeel Eaqub last week pointed to the relatively minor size of the sector and argued the impact of the collapses was being "overdramatised".
That theme was picked up yesterday by Westpac's chief economist Brendan O'Donovan and research economist Dominick Stephens.
They said the failures did not represent a significant risk to either the financial system or the wider economy.
While Eaqub estimated finance companies' share of all lending in New Zealand's finance sector at 8.4 per cent, Westpac said their total assets came in at just 5 per cent of the sector total and noted the Reserve Bank's view that "[finance company] failures do not in themselves pose a threat to financial stability".
Estimates of the amount New Zealanders have invested with finance companies vary from about $9 billion according to Reserve Bank data, to about $12 billion suggested by industry figures.
Although the amount of deposits affected by the seven finance-company failures over the past 16 months has climbed to $1.2 billion or at least 10 per cent of the sector total, O'Donovan and Stephens said eventual investor losses were likely to be too small to materially affect the economy.
"Investors will not lose the lot, so actual losses will be more like $0.5 billion - a mild hiccup on the stock exchange."
O'Donovan and Stephens said the main issue for the sector had been access to funds rather than the quality of assets.
"Investors' 'losses' will massively overstate economy-wide losses. As one investor group bails out, another will pick up assets cheap: more of a transfer, rather than a loss, of wealth."
Westpac saw minimal impact from some finance companies cutting back on credit to consumers and property developers.
Banks were likely to step into the breach, as were other, stronger finance companies.
Indeed, Westpac itself seemed eager to grab a chunk of Property Finance Group's reverse mortgage book just days after the company fell into receivership, last week offering to waive upfront fees for customers if they applied to refinance with the bank, "to ease the burden for those impacted by the finance company failure".
That is in spite of the fact that as Property Finance Group's receiver Brendon Gibson pointed out, all of the company's loans, including home loans and reverse equity mortgages, will continue to be managed by independent securitisation trusts who are highly unlikely to call any loans in.
O'Donovan and Stephens said the most important impact of the failures was likely to be on general economic confidence.
"Credit difficulties are going to exacerbate the housing downturn, which has already begun," they said. "This could create a vicious circle, as the weaker property market causes lenders to tighten their lending standards."
The weaker property market would also crimp consumers' ability to borrow for consumption.
"We fully expect the second half of 2007 to be a weak period for the New Zealand economy."
But that weakness was likely to be short lived thanks mainly to skyrocketing dairy commodity prices.
"The dairy boom completely dwarfs the finance company sector collapses in terms of economic impact."
TOTTING UP
The finance company sector:
* Total assets: $17.66 billion
* Total liabilities: $16.05 billion
* Debentures and notes on issue: $9 billion-$12 billion