By Bernard Hickey
John Key and Bill English will have to decide by Tuesday whether South Canterbury Finance really is Too Big To Fail.
The government has already guaranteed the NZ$1.7 billion worth of investments in South Canterbury Finance by more than 20,000 investors until the end of next year.
So many would say it has already decided South Canterbury Finance is Too Big To Fail by accepting the nation's largest independent finance company into the extended scheme earlier this year.
But now the government faces an urgent decision between putting South Canterbury into receivership now, or putting in yet more taxpayers money in the hope it can survive and then thrive past the end of the government guarantee.
The choice is a difficult one. The immediate pain from a receivership would be substantial.
Receivership would trigger a payout to investors under the government guarantee of around NZ$1.7 billion. Some believe that shock to the government's finances would be enough to trigger a review of New Zealand's sovereign credit rating downgrade by Standard and Poor's and/or Moody's.
I don't believe it would be enough to justify a rating review, but if it did that would immediately increase wholesale interest rates, which would eventually flow through to the entire economy. There is also the fallout on the South Island rural economy.
Any receiver would force through sales of farms, property developments and small businesses, many of whom are not paying the interest on the loans received from South Canterbury Finance. Dairy farm prices in the South Island could potentially take a big hit. Some believe this could send a new chill through the South Island that eventually cost jobs and stunt any recovery of economic growth. That's because the Australian-owned banks are unlikely to step in to take over the loans.
Yet this pain of receivership may be less than the eventual pain of a slow-moving collapse of South Canterbury.
Let's not create more Zombies
Sometimes Zombies need to be put out of their misery before they infect others.
South Canterbury Finance does not have a future beyond the end of the Deposit Guarantee. To have such a future, it would need to substantially increase its credit rating, find a new funder and convince already sceptical investors to go naked in backing the finance company without a deposit guarantee. They will also have to do it without their talisman Allan Hubbard, who will be long gone as owner and maestro.
At some point New Zealand's dairy farming sector, particularly in the South Island, will have to reduce its debt.
When that happens it will be painful.
But as many investors in finance companies such as Strategic, St Laurence, Hanover and Dominion would attest, giving finance companies more time to 'work it out' and wait for the 'market to bounce back' is often worse than pulling the plug immediately. The New Zealand government faces a bail out decision in the same way Hanover Finance investors did 8 months ago and 12 months before that.
Those investors chose badly. Let's hope the government does not.