Government guarantees – But what about my finance company?

Government guarantees – But what about my finance company?
 
The government guarantee for banks, building societies, credit unions and finance companies has brought some relief to financial markets after last week’s depressing news.  The only good news for New Zealand investors was that the NZX performed relatively better than most other markets last week and has fallen 35.4% from its high in May 2007 compared with an average decline of 46.4% for the other eight markets included in the table below.

World Sharemarkets – Bears in full control

*in local currency

The Government guarantee is a positive move but more than 100,000 finance company investors will be asking why it doesn’t apply to their investment. 

South Canterbury Finance, Fisher & Paykel Finance and Marac Finance, owned by Pyne Gould Corporation, are covered by the guarantee but Hanover Finance, Dorchester Finance and Dominion Finance, amongst many others, are not because they have defaulted. If the directors and management of the last three companies had been able to hang on just a little bit longer then their companies would probably be safe.

This demonstrates the importance of having a strategy that enables a company to prosper in good times but survive any downturn. 

There are a number of other issues in relation to the guarantee including:
- Government bond yields have risen this morning because of concerns that the guarantees may have a negative impact on Crown finances 
- Companies may find it more difficult to raise short term funds because they will have to compete against Government guaranteed bank securities 
- Institutional investors may switch some funds to Australia because bank wholesale (non-retail) deposits are guaranteed across the Tasman but not in New Zealand.

But the most important point is that there is no such thing as a free lunch and there are stories from Ireland, which has also guaranteed all bank deposits, that public servants are beginning to interfere in the running of the Irish banks. That is not something we should look forward to.
         Brian Gaynor, 13 October 2008