PM revises South Canterbury Finance cost to taxpayer
Prime Minister John Key yesterday released a revised cost estimate for the government's retail deposit guarantee scheme – while criticising the scheme's initial design.
He also confirmed that moves have been made to sell South Canterbury off.
Mr Key told media at his post-Cabinet press conference yesterday that the net cost of the retail deposit guarantee scheme to taxpayers is now considered to be about $300-$400m.
He broke the figures down as follows:
- no more than $900m to cover all the companies covered in the retail deposit scheme;
- $100m saved by the Crown's move to buy out South Canterbury depositors;
- a combined $400-$500m in fees paid by companies to be part of the retail deposit scheme and wholesale funding guarantee facility.
Mr Key said yesterday that the Crown had largely collected on the $200-$250m in fees from retail deposit scheme participants.
Once an additional $200-$250m from wholesale guarantee participants is collected, this will take the net combined cost of the schemes down to $300-$400m.
No claims were made on the wholesale guarantee scheme, which expired on 30 April.
Mr Key was scathing in his criticism of the original retail deposit scheme’s fee structure.
“The one thing that was just plain downright dumb was the way the scheme was established, in that they didn’t charge fees to smaller players aka the finance companies, but they did for the commercial banks.”
"We changed that when we extended the scheme, but the crazy thing was that the South Canterburys of the world went into the scheme and didn't pay virtually anything for it."
The scheme was initially free for those with deposits under $5 billion while those with over $5 billion were charged 10 basis points per annum on their deposits.
Within the week, the RBNZ and Treasury tweaked the scheme to charge smaller companies a fee based on cumulative deposit book growth and credit rating.
NBR reported in April that South Canterbury would have paid about $2.25m per month to be part of the extended scheme from October.
Mr Key said that, given acute risks to the financial and banking system in late 2008, the government is satisfied that establishing and maintaining the guarantee scheme was the right move.
A collapse in confidence and a flight of funds to overseas deposit guarantee schemes would have left the taxpayer with a significantly higher bill, he said.
Looking for buyers
Mr Key said that the total - but partially recoverable - cost of buying out South Canterbury depositors remains at $1.6b-$1.7b, plus a $175m loan to debt investors with ‘prior charges’, including Torchlight.
The net loss from the buy-out is expected to fall to between $500-$600m once assets and the loan are recovered. The exact figure will depend on whether South Canterbury can be sold as a going concern.
Mr Key confirmed that, from yesterday, South Canterbury’s receivers are calling for expressions of interest from buyers.
“We would prefer that the assets be sold as a going concern although we have an open mind about the shape that any bids might take,” he said.
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Comments and questions12
With the greatest of respect to the PM the estimates above do not reflect the true cost. What the headline should read is the overall estimated cost to the taxpayer for the scheme as the figures are reliant on the fees made by banks to "adjust" the true cost downwards. Would it not be more prudent to announce the auctual cost once it is washed up?
Mr Key's spin on the DGS deserves criticism. Mr Key supported the scheme from its outset and even wanted to extend it to wholesale bank funding (see http://www.lostsoulblog.com/2008/10/david-bennett-national-party-from.html). However, advice from RBNZ and Treasury on 10th Oct 2008 was that it was not necessary not desirable (see http://www.treasury.govt.nz/publications/informationreleases/guarantee/pdfs/t2008-2000.pdf ).
The major NZ banks retained access to the supposedly closed US commercial paper market as affirmed in the above advice and confirmed in the May 2009 Financial Stability Report by the RBNZ: 'New Zealand banks were generally able to issue CP during this period, maturities were typically very short and the cost was relatively high by historical standards.' NZ major banks retained ample other sources of funding including selling assets to their parents, borrowing from their parents, and using their residential mortgage assets as security for borrowings from the RBNZ, and US CP funding becoming more expensive, of course they used some of these cheaper alternatives (see http://www.lostsoulblog.com/2010/01/even-more-evidence-nz-big-banks-had.html ). In the situation of late 2008, the NZ major banks were well capitalised, and able to pass on the higher funding costs to borrowers, meaning that neither their capital adequacy, profitability or liquidity was threatened: 'These costs are being passed on to both households and businesses and credit conditions are tightening.' (Financial Stability Report May 2008, p 24).
Even if one or more of the major NZ banks were faltering or had failed, this does not imply that the NZ financial system was in jeopardy, or that NZ taxpayers were on the hook. Any of the major NZ banks could have been put into statutory management, depositors and other creditors funds partly converted to equity, and the bank re-opened within days. This creditor recapitalisation method means that the bank creditors take their losses and the disruption to the banks customers and the financial system is limited, and taxpayers are not required to socialise the bank's losses. The benefits of this policy were outlined in 2001 by then Deputy Governor of the RBNZ Dr Rod Carr (see http://www.rbnz.govt.nz/research/bulletin/1997_2001/2001jun64_2Carr27jun.pdf )
Now that taxpayers have paid out large sums of money to make whole the creditors of a rotten second tier financial institution, Mr Key is wanting to justify the results after the event by alleging that the alternative was worse, and claiming as a public good the revenue extracted from the large strong banks that never needed the scheme.
Mr Key, NZ needs some real leadership on banking and financial policy, and it means having the balls to see financial institution creditors take their losses promptly and financial institutions that can't maintain the funding they need to be promptly restructured or closed rather than lingering on with taxpayer guarantees and ultimately taxpayer losses.
The math above covers the cost of the scheme... not the cost of South Canterbury;s failure. Whether SCF failed or not, the fees from the banks would have been collected anyway.
This is simply a bit of an effort from the Government to deflect some damage.
Also, bear in mind, the Govt has no friggin idea what they will get what for the SCF assets and the above numbers are a ropey estimate, at best.
Precisely what would you have done then
All comes back to the man in the street.
If the banks have to pay into the scheme guess where they will cover the extra costs from?
End user
Higher interest costs on your mortgage.
Social welfare for the well-off. Bring back Helen.
The real facts are that the Government chose ( on the poor advice of Treasury ) not to accept a good offer for SCF, that would have saved it and left it highly capitalised for growth. They would have only lost $400m maximum.
Now they will lose upwards of $600M/$800M as all bidders or potential buyers will now just wait for bargains - no buyer in their right mind will buy the whole company - why would they?.
So who will take responsibility for this balls up?
So the Govt spin on how the overall Govt guarantee fund will only lose $400M should read " Government Balls Up and Govt Guarantee Scheme To Lose $400M instead of being Square ( no Loss ) "
Treasury has given poor advice to the Government.
"Mr Key, NZ needs some real leadership on banking and financial policy, and it means having the balls to see financial institution creditors take their losses promptly and financial institutions that can't maintain the funding they need to be promptly restructured or closed rather than lingering on with taxpayer guarantees and ultimately taxpayer losses."
Well said David. Unfortunately IMHO we have banksters and traders with no principles running this country.
With the Foreshore & Seabed debacle taking place I have to wonder if Mr Key orchestrated the timing of his intervention of SCF to take the heat off their shonkey F & S bill.
SCF difficulties should have been addressed months ago.
"All comes back to the man in the street.
If the banks have to pay into the scheme guess where they will cover the extra costs from?
End user"
True but, who was panicing about the viablity of the banks/finance companies and wanted a Govt guarantee ? the end user.....and to those tax payers who didn't have investments, and therefore didn't get the benefit (but all the cost) of the scheme, remember, without the NZ investor your standard of living would be well worse than it is currently ....your contribution to paying for the scheme is part of your thank you to them
f*uck them all. Allan hubbard you are a disgrace to nz and should be deported from this country
honestly, do you think somebody is actually going to read that nonsense? Have a think about what you post before you post it!
J Alve, I don't see eye to eye with David on Allan Hubbard the person, however, on the Deposit Guarantee Scheme his comments, especially over the last three days, have been spot on, and stated very well.
There should never have been such a scheme for the reasons he mentions, especially on his 10.03 post on this thread:
http://www.nbr.co.nz/article/bollard-reveals-tale-deposit-guarantee-scheme-129482
That analysis and summation should be pinned on the fridge of every politician who voted for it, and sanctioned it, in Labour and in National. The scheme caused all the problems, displayed the moral hazard, as well as any textbook could have explained it.
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