Treasury predicted SCF's failure early on

Treasury officials were predicting South Canterbury Finance's (SCF) collapse even before SCF was approved entry to the government's extended retail deposit guarantee scheme on April 1 last year.

Friday, April 15th 2011, 7:21AM 2 Comments

by Jenny Ruth

In a report dated March 8, Treasury estimated "it is probable that SCF will default under the existing Crown Guarantee in or around June 2010."

It was then estimating such a default would cost the government nearly $700 million, including interest.

The report was among about 200 government documents relating to SCF released today.

In an update dated May 18, John Park, the guarantee scheme's manager, said while SCF's debenture reinvestment rate had recovered to about 50% following the granting of the extended guarantee, it had deteriorated to 31% by the week ended May 7, 2010.

New money inflows then represented only 20% of the amount needed to cover outflows from maturing deposits.

"Unless deposit rollovers and new inflows dramatically improve, SCR will be reliant on asset sales and loan realisations to avoid failure within the next six to eight weeks," Park said.

An 'aide memoire' Treasury provided finance minister Bill English on May 28 warned: "SCF is about to fail. This will occur within the next six to eight weeks. However, it could occur next week."

At that point, Treasury was expecting the collapse would cost the government $720 million.

SCF finally went into receivership on August 31 last year.

The documents also detail various attempts to rescue SCF. Although the names of many parties involved were withheld, a letter from Treasury to SCF's then managing director dated June 3, 2010 is labelled "Proposed Issue of Secured Bonds to Torchlight," presumably George Kerr's Torchlight Fund. In the letter itself, which discussed a $100 million bond issue, the name of the proposed bond acquired was deleted.

The government now expects the guarantee scheme will cost it about $1.2 billion, mostly due to losses from SCF.

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Comments from our readers

On 16 April 2011 at 8:57 am Independent Observer said:

As noted by the Butterfly Effect – every action has a consequence. The Government bailout of finance companies such as SCF will have a significant impact on the operation and confidence of debt markets for years to come – as taxpayers are forced to pay a bill that it can’t afford.

Markets should be left to operate without Government intervention – whereby secured & unsecured creditors face the risks that they originally subscribed to.

The actions of the Government (and other Governments) confirms that the asylum is indeed being run by the idiots… with little hope of rescue on the horizon

On 19 April 2011 at 5:29 pm traveller said:

Seems SCF was getting pretty close to being a Ponzi scheme - money coming in was needed to cover money going out. I agree with Independent Observer, the Government Guarantee is an expensive disaster. I would not have guaranteed anything. I understand 70% of investments in finance companies were not made via an adviser and people should take the consequences of their decisions on the chin. Some advisers never put client money into finance companies or got it out when they saw the writing on the wall. Why did other advisers not see this disaster coming?