$219,000 in interest daily for bailout

Photo / Sarah Ivey

The Government will pay more than $200,000 in daily interest on this week's $1.8 billion payout to South Canterbury Finance investors, but has had plenty of time to buttress its finances against the impact.

South Canterbury is the largest in a series of more than 60 financial institutions in this country to fail in the aftermath of the global financial crisis, taking the total amount of investor funds affected to $8.5 billion, according to interest.co.nz.

This week's payout of $1.775 billion, including $1.6 billion under the retail deposit guarantee, will cost the taxpayer about $219,000 a day in interest alone.

That estimate assumes a longer term borrowing rate of 5.29 per cent for the Government's $600 million expected net loss and a shorter term rate of 4.1 per cent for the remaining $1.175 billion, which is expected to be recovered within three or four years.

This week, Prime Minister John Key indicated funding the South Canterbury payout was not an immediate concern for the Government.

"The DMO (Debt Management Office) has actually been raising funds at a faster rate than we've needed them at the moment so the Crown has plenty of cash to meet that liability."

A Treasury spokesman said South Canterbury's failure was well anticipated and covering the cost of paying out its investors was incorporated into planning by the DMO, which funds New Zealand's deficit by borrowing from banks and other lenders locally and internationally.

The Treasury first disclosed it anticipated making huge payments to finance company investors in October last year when it set aside $816 million to cover deposits in financial institutions it deemed "more likely than not" to fail. Subsequently, as that total crept higher, Treasury sources revealed most of the liability was related to South Canterbury. Now that South Canterbury has gone, the Treasury expects very few of the remaining 21 finance companies covered until October 12 will fail and none will be the larger ones, virtually all of which are backed by owners with deep pockets. "All the bad stuff that was going to happen has happened," the spokesman said.

Only four finance companies will be covered by the extended guarantee schemefrom October 13.

The Treasury has paid or will pay out $1.85 billion to investors in the eight companies covered by guarantee which have failed and expects its eventual net loss will be $887 million once payouts are offset by recoveries from the failed companies' receivers.

Much of that will be offset by the fees the Government has received from the retail scheme and the wholesale funding guarantee introduced at the same time.

Data released last year show the Government had received $228 million in fees for the retail scheme - most of that from the large banks whose chances of failure the Treasury regards as "remote". Updated data to be released soon will show further fees collected which are unlikely to be far short of that amount.

Meanwhile, a source at one of New Zealand's major trading banks estimated those banks have also paid a further $200 million or so in wholesale funding guarantee fees.

The Scale of Failures

* South Canterbury Finance $2 billion in assets - 1 per cent of NZ GDP

* Lehman Brothers US$639 billion in assets - 4.6 per cent of GDP

... and bailouts

* The NZ Government's $1.85 billion in payouts under the retail deposit guarantee - $422 for each New Zealander.

* The US Government's US$700 billion finance industry bailout - US$2200 for each American.