SCF is too big to fail!

So it would appear if this article in today’s Sunday Star Times is accurate.

Greg Ninness writes:-

Although the final details of a rescue package to save South Canterbury from collapse are still being finalised, they are likely to include an arrangement for the government to take over more than $500m of the company’s impaired loans.

If done at face value this would inject some $500 million into the company. It would avoid as well the impact of a collapse having a substantial flow-on effect on the South Island economy, as receivers/liquidators were appointed to SCF and then moved to active and aggressive loan recovery, possibly causing substantial numbers of receiverships and liquidations.

Ninness concludes his article:-

The controversial part of the plan is the initial $500m or so the government will need to stump up, although the ultimate cost to taxpayers would be less than that because the government would eventually recover some of the money from the bad loans, possibly as much as half.

But if South Canterbury is not recapitalised and is eventually tipped into receivership, the government could be liable for $250m anyway under the Deposit Guarantee Scheme.

The proposal may not be any more expensive, and, as well as protecting retail investors, would prevent the possible contagion effect from a major financial institution’s failure, while ensuring the economic benefits of having a substantial finance company lending into the business sector.

Presumably the government would seek work-out arrangements with non-performing debtors in order to avoid causing business collapse and economic hardship including negative impact on employment.

They will need to develop a sound business case for ‘rescuing’ SCF when they did not do so in other cases and to avoid establishing a bad precedent, whereby imprudent managers grow businesses unwisely on the presumption that the government will step in to rescue depositors and others should the business fail. At the very least taxpayers should be given regular reports on the situation and a clear understanding of the economic justification for any rescue. Woolly statements of justification will not be enough.

Some Thoughts:-

1.If the taxpayer is to foot the bill for SCF, we need to know the full financial details;

2. Furthermore if there has been wrongdoing, then prosecutions should be proceeded with.

3.It would be helpful to understand why the government allowed SCF to renew its place in the deposit guarantee scheme earlier this year?

4. This prompts a further thought, in that should earlier action have been taken to resolve the SCF situation?

5.The position that exists now has been on the horizon for months, so why let SCF stagger on? Why was concrete and decisive action not taken sooner?

6. It is high time that a formal enquiry into the causes of the various finance company collapses was established, so that we can more clearly understand what went wrong and what regulatory and other changes are needed.


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