Opinion: Why the government should allow South Canterbury to be put into receivership

Opinion: Why the government should allow South Canterbury to be put into receivership

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.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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When you think about it, what future does SCF have?  Who is going to trust it enough for invest money in it, ever?  The name is hopelessly tarnished.  The same argument goes for some big-$$ investor taking over the company - what sort of brand and good will would they be buying? 

The reality with farm land is that it is hopelessly over valued at present.  A woman at work has a "farm" in the back country, it is as steep as, inaccessible, & mainly covered with bush & scrub.  Yet it is "valued" at $1.5 million.  Time to let it return to a value that reflects its actual productive potential.  Keeping zombie quasi-banks on life support, just to sustain these valuations, is both crazy and inefficient. 

Yes, there will be pain, but it needs to happen, sooner or later.  Why drag it out by risking taxpayers' money?  And isn't farming supposed to be part of a capitalist system, not a socialist state-directed one?

Cheers to all. 

According to this, which quotes Hubbard, it sounds as though Treasury will (thankfully) reject saving SCF


You so sure about that. Who is your source

Farmer Will, is this a wind up? Are you in business to make as little money as possible?

If I understand you correctly, you'd rather pay interest  to the bank so you can reduce your tax.

Your tax is probably no more than about 30% of profit, how are you better off?

Why not ask Watson and Hotchin to mount a rescue ?

I am sure they have enough moolah stashed to give it a go.

South Canterbury has been a Zombie for sometime. So let's not say that if SCF is not saved the NZ economy will be effected. They have not been actively lending for since late 2007.

The gov't has consistency demonstrated over the years that it is not a good manager. They are especially not a good banker of banks (BNZ). Moving into agri/sme lending is a stupid move. The government know this but need the to insure any political fall out is minimum. Key is not stupid. They have expertly undermined the credibility of Hubbard and will continue to isolate him from any support he has. Watch as the Hubbard supporters fade back into the South Island high country as more is drip feed to the public.

The issue is the process of liquidating SCF. The gov't understands that a quick liquidation which floods a rural real estate market which has no bids is not the answer. Foregins will swoop just as they are in Uraguay.

That is the delemia - How to ensure productive land is not given away to foreginers at prices which are too low. Gearing up landcorp or some other insitution to take over 1% of NZ's dairy herd is important.

Didn't Allan Hubbard say he would throw money at the problem to make up any shortfall.....


For Sale


Yellow VW,  offers please

BH says - "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."


Bernard - I have asked this question repeatedly, how did SCF manage to get an extension to its Gov't G'tee earlier this year.  Surely the Treasury officials who went through the accounts must have been completely negligent.  Can you please get an answer to why this G'tee was extended.



I am wondering whether this whole sorry episode has been orchestrated by insiders working to protect their money.

The outing of Aorangi and statutory management  put direct/indirect pressure on SCF to reexamine its book/status and so it has also been forced to look for rescue.  

Finally the whole thing will end up in the lap of the government which will have to honour the guarantee and pay off the investors.

Seems like someone or a group of interested people have stage-managed all this and are waiting to collect soon.

Just like the bailout in the US was orchestrated by the Wall Street Bankers with the help of key officials in the Administration.

How about they publish a list of the debenture holders and other creditors detailing how much each is owed and how long each has been due.

These comparisons with Air NZ are a load of cobblers.  When the govt bailed out Air NZ, people were happy to buy tickets for flights, as the overall risk was minimal.  But investing tens of thousands in a finance company is a totally different beast.  You want close to absolute confidence that you will get your $$ back. 

OK, the govt also bailed out BNZ.  But in that case, there was an implicit govt guarantee, so the Joe Blow public was happy to keep putting their little bit into it.  A finance company, one without a govt guarantee (which in the long term is how they have to operate, or the whole concept of a finance company becomes meaningless) is a different kind of risk. 

No the brand of SCF is totally defunct, no future in it.


Fair enough, as you say people should be responsible and paying by themselves for their failures, I agree.  But I can’t remember you saying same when banks worldwide  needed bail-out few years ago. If BNZ runs into trouble again next year and say same happens  would you be saying the same or advocating bail-out? 

Someone back there had it right, methinks. Too many 'big boys' involved and wanting to not get burned.

So the poor old taxpayer underwrites. The problem there is that there is a limit to that too - this is a permanent recession we're looking at - but for a 'pollie' to acknowledge that permanency, whilst guaranteeing certain sectors immunity, would be to admit fraud. So I don't think they'll acknowledge.

This ain't the only problem facing them in the next twelvemonth, either. Despite the teflon protection (note the 'surprise visit' to Afghanistan the weekend 40,000 marched?) Key is looking like a one-term phenomenon. Without him, the rest closely resemble a headless chook.

They run around for a bit, but they always fall over.

I thought they had already changed their name to 'Sub-standard and Very Poor'

"Wrong" ...let's just see if we can beat the government spin doctors to the justification......"..so I have to tell you that the govt has decided after much thought to put to one side our firm and unwavering support for free enterprise and the separation of private business from the state...err arm... have decided to use govt funds to secure the future for the many farm owners and related companies in the Canterbury region by providing a capital injection of $500 million...on the firm understanding that all of those involved will turn out on election day next year to support the local National Party candidate."

But maybe the won't. Maybe they will be honorable and won't socialize the losses (beyond the guarantee) that is. Maybe there IS no conspiracy. Maybe the government IS doing the right thing. Maybe officials are Not being influenced.

And if that be the case aaa Wolly will say sorry...but Wolly expects the govt to behave the way all NZ govts have behaved in the passed...what about you aaa?

If that is the case and they bail them out, then this government is no better than the last. I will apologize to you wolly and make sure my vote goes to the greens or united future

What makes you think you have a right to a bailout Angus...you're just a Kiwi peasant...you don't own a business that's made stupid investment decisions for yonks and put at risk hundreds of millions...pay your bloody taxes and be grateful you have people with integrity in govt prepared to save their arses in an election  using your money. Any more moaning and you can expect to be paying another tax...or three.

How about this ?

Nationalise (pun intended) SCF and negotiate longer repayment terms with the debenture holders/creditos, get new management to run the company and gradually get it to a stable position. With the Government ownership, the panic will subside and business can go on till times improve. The present owners have to take a hair-cut in their stake as payment for mis-management. They don't get much payout for the takeover.

There is no immediate payout by the Govrnment, so its finances and rating are not affected.

May be down the line, they can sell it for a profit too.

The government will also be looking at the timing issues here and comparing the relative risk to their reputation as a result of whatever action they take.

If they say no, (which IMO they certainly should) and the receivers are called in then there will no doubt be political damage in S. Canterbury (but I would say so what, the folk down there seem to have collectively lost their reason in following their messiah), but not that much elsewhere.

This is because they can hide behind the fact that the retail scheme was not their invention and SCF joined it initially under their Labour predecessors. Now you could say (very reasonably) that the decision to let SCF into the extended guarantee WAS their decision (well Treasury's but we know who calls the tune really), but note that this is all coming to a head just before the extended guarantee actually comes into effect (how fortunate), so they have a get out of jail card there. They also have the fact that loss provisions of $800m have already been made against the GG so they can turn around to the taxpayer and say - 'its bad, but we have already budgeted for it, and by the way the original decsions were all taken under Labour'. So take this option and all in all the potential political damage is contained and of a relatively defineable quantity - with a known end-point (the wind down of SCF and the re-payment of debentures etc).

However, take option B - the bad bank plus a 're-animated' SCF and all of a sudden (from a political stand point) you introduce a whole range of unkowns. Anything that happens henceforth can now only be laid at the feet of National as they will actively have made the decision to prolong the SCF story. No more escape clause as to the origins of the GG under Labour.  There will still be substantial financial loss anyway (buying the bad banks assets has been estimated to cost $600m) and then there is the not insubstantial risk that the 'good' remnant of SCF runs again into trouble again some time next year (particularly bad if its towards the election date). 'Throwing good money after bad' then becomes an easy slogan for the opposition. Recall that in all cases thus far, Finance company accounts have tended to progressively deteriorate over time, even after moratoria, take-overs etc - just look at the Hannover story and ALF!  Even PGC and Marac which went down the good bank/bad bank route are still finding out their initial provisions were far too rosy and are still throwing up impaired loans. 

Even worse - another scenario - the new investor who comes on board with the good SCF bank, rapidly starts asset stripping it (anyone care for a large unjustified dividend payout? - its happened before!) and 12 months down the line leaves a wreck that not only needs more govt pumping in, has now also been tainted by what you might call 'sharp' business practice. A wonderful vote winner!

If I was a policy wonk with national I'd be telling them to shut SCF down pronto and take the local SI flack NOW. Re-animate the corpse and you generate a vast range of known unknowns (good old Rumsfield) and run the real risk of its exploding in their faces close to an election, where it wont just be a few SI cultists getting upset with them.........

Absolutely agree. I recon all the media noise is an orhested campiagn by the mighty one down south who while looking naive really knows how to manipulate the press. The campaign is to force the government to bail out when it really doesn't want to. Also all treasury advice etc will be discoverable, so if minister goes agosnt a recommendation, then really looks bad on Nats. For once I hope political decisions are made on economic reality rather than a number of lobby groups

 "Farmers are the one group in this country that knows it will never have to face the harsh choices the rest of us do sometimes".....what a total load of effluent anon. !

Spot on IMHO David, your strategy makes total sense. 

I really resent the way this (and others) finance company has been promoting itself since the Govt. G'tee. Virtually saying " doesn't matter how crappy our loan book is, we've got the G'tee". Disgusting.

No worries folks...sit back and watch the Cabinet squirm...do they present themselves as being the backbone of capitalism by saying "no" to handing over taxpayer money to prop up a failing private finance company that has been on GG life support for nealy two years.....or will the Cabinet present themselves as having no backbone and say "yes"!

Oh but the potential political pain!

Personally, I feel rather sorry for John Key on this one.

A real case of damned if you do, and damned if you don't.

It's down to a political calculation about what is least damning:


"But he reiterated assurances that a $900 million rescue package earmarked for investors affected by finance company failures would protect depositors should the company go under. " 

'Deal could still save SCF - Hubbard '


"Federated Farmers president Don Nicolson said the impact of a collapse would be severe.

"The cascade of a meltdown will not only be felt inside the farm gate but outside the farm gate through the investors and the communities of the region," he said. 

Maybe some do and some don't anon but here's a suggestion for you...turn up to a sheepshed meeting and give them the benefit of your opinions...I promise you will be looked after...even listened to...give it a try anon.

IMO, Don Nicholson is right to point out what he has.

Get real, think context, vulnerability and criticality, see:


If you want it to change, change the shape of the economy, that means:


"The government would be more astute to understand what underlies our atrociously deficient record on investment. It’s not lack of savings that’s led to our slide down the OECD per capita income rankings; it’s the tax breaks and directives to banks to lend to those who have accumulated property rather than put it to work, and have purchased farms rather than invested in farm productivity." 

Ready for some change then?


Any criminal proceedings against those who brought the companies to this stage ?

Anon @ 7.51 - right on.

The BB/middle class swallowed it hook, line and sinker. Exponential growth forever on a finite little tennis-ball spinning in space. That myth was needed to underwrite what was borrowing from the future. The future, from this point, can't pay.

If they didn't have the cranial capacity to step back and see the bigger picture, tough. Some of us have been warning of it for decades.

Interesting thing now, is that I suspect our elected crowd suffer from the same cranial affliction. They will consider reacting in a way which hastens a return to BAU.

Which -  as this little exercise should point out - has ceased to be AU.

We live in interesting (oops) times.

So what have we learned! Not much, apparently.

"...DFC, and the lessons the Reserve Bank, has learned. These lesson relate to both the causes of the DFC failure, and to our handling of the that failure......government guarantee. This guarantee was removed with repsect to all debt issues in 1977....At the end of 1990, Sandy Maier...took over as Statutory Manager...."



Wow....this has got the blood pumping.... what a curly one John Boy...!

You are indeed damned either way.

As I said the other day the outcomes one way or the other will be affected by a measure of ...........intent......... to defraud by Hubbard through a network of dealings.

Irrespective of academic opinion the face saving exercise will become more important than the collapse itself..... and in that I say the SFO are working their nuts off looking to expose ............(or cover) the trail of the tape.

 Being seen to have done due process prior to today's announcement will have been crucial ...or they  (the Govt) may even use this a a stall and gauge tactic.

My money say's that if the sheet is clean on......... intent......... they will bail it with a( Proviso) that may include some interesting clip ons.

In your short verse..a mouse.... exactly who would Jesus be talking to....a brief chat with Hubbo about vanity may have served a better lesson.

Just as an idea, would the taxpayer be better off if the government keeps SCF going until the GG runs out?

Then they could let it go down the gurgler, and just bear the loss of what was put in to keep it going rather than the cost of the whole capital write-down and receivers fees etc.

Of course, they would have to keep such a strategy entirely secret otherwise investors wouldn't touch SCF with a 40-ft barge pole...or maybe they would; there seem to be some idiotic investors around.