Guarantee scheme payout is insurance premium

September 9, 2010

Finance Minister Bill English made a Ministerial Statement to parliament  on South Canterbury Finance yesterday in which he explained the background to the Deposit Guarantee scheme.

While the Crown has had to make good its guarantees to depositors, it will recover some of the proceeds out of receivership. Once the receivership is finished, this will largely complete the cycle that began in October 2008.

When the fees collected from the wholesale and retail guarantee schemes are included, the net cost is likely to be between $300-$400 million.

While this cost to taxpayers is considerable, this expenditure did help prevent the potential collapse of the financial system.

In the light of ongoing bank bailouts around the world, this net cost is the premium our economy has paid to avoid potential catastrophic losses to the taxpayer over the last 18 months.

In other words it was like paying insurance.

It’s easy to forget just how fragile the international economy was when the Deposit Guarantee Scheme was put in place.

Once Australia had one, New Zealand had to follow to forestall a run on banks here. Once we had the scheme the government had to honour the commitment first made by Labour when it introduced it and it’s done it in a way to minimise the cost and damage to the wider economy.

As this week’s Listener editorial says:

SCF went broke for all the usual reasons that companies go broke – bad management, weak governance and hubris.

In fact, confronted with the inevitability of SCF’s collapse, the Government’s response has been deftly focused on settling investor fear and limiting the economic fallout.

The government is now in control and that means there will be no fire sale of assets which is important to maximise the return from the companies and farms SCF owns.

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