Revised Canterbury quake bill exhausts disaster fund
The credit ratings of the Government and EQC are safe for now, but Standard and Poor's has noted a ''material deterioration'' in the credit-worthiness of state's disaster insurer.
And the Government needed to stick to its tight spending script to avoid a credit rating downgrade in the long term, an economist warned.
Finance Minister Bill English today revealed fresh estimates put the cost of the Canterbury earthquakes to the Earthquake Commission (EQC) at $7.1 billion - some $4 billion more than earlier believed.
That pushed the projected Crown deficit out to a historically high $18 billion, sparking fears of a possible credit downgrade.
But S&P this afternoon said its ratings for both EQC and the Government overall remained unchanged.
"We are working through the implications of these revised estimates on the Crown's operating balance and projected debt profile, and we do not have anything to add to our previous comments on New Zealand's credit quality,'' the agency said in a statement.
New Zealand's credit quality remained ''weakened by its high external liabilities, despite some deleveraging in recent years,'' the agency said.
And the ''stand-alone creditworthiness'' of EQC had ''materially deteriorated'' after today's announcement.
But S&P would not move against EQC's rating because of the ''very strong support'' from the Government.
''While there is uncertainty as to the future structure and capitalisation of the EQC, we believe the EQC will remain very strongly supported by the Government,'' the agency said.
English acknowledged this morning that EQC's future was under review.
The new estimates ran down the Natural Disaster Relief Fund to zero, leaving the Government to pay for any shortfall and to foot the bill on any fresh disasters.
He would not rule out any new revenue streams to help fund recovery.
''The fund we had six months ago, which was $6 billion is all committed to the Christchurch earthquake. Clearly, if we were going to rebuild it then we'd have to get the revenue from somewhere,'' English said.
An earthquake levy proposed by the Green Party was still off the table ''in the immediate future,'' but the EQC model, including the way it was funded, was under review.
''The whole episode of Christchurch has highlighted both the strengths and weaknesses of EQC and when the time is right, we'll examine whether that is the right framework to continue with,'' English said.
Asked if he feared a ratings downgrade, English said: ''You weigh it up, don't you? On the one hand, it's a one-off, on the other hand, it is a bit of a setback when you were making significant progress.
''It makes us a bit more vulnerable today than we were before we knew this number.''
The Government did not see a need to change its spending track, however.
''You need to see this in the context of the broad balance sheet. It's a $4b extra setback but it is on the balance sheet of a couple of hundred billion,'' English said.
The Government needs to stick to its tight spending script to avoid a credit rating downgrade in the long term, ANZ chief economist Cameron Bagrie said.
''They can't keep borrowing money indefinitely.
''We don't like to see the government chequebook pretty tight but that is going to be the reality for the next 10 years, because the alternative is if they don't stop big deficits and rising debt, the credit rating agencies will downgrade us, without a doubt,'' Bagrie said.
But there would not be an impact on New Zealand's credit rating in the near-term as the government accounts were tracking a little bit ahead of expectations with tax revenue slightly higher and signs of spending restraint, Bagrie said.
''This puts them a little bit behind... It's problematic but it's not eye-watering in terms of warranting severe action.''
''The critical thing for the rating agencies is the Government continues to deliver and execute on a clear fiscal consolidation strategy.''
Which meant a plan to turn big deficits into surpluses, he said.
The higher estimated repair bill confirmed that damage was larger than earlier estimates, but that also meant a ''bigger kicker'' when the rebuild arrived, which would be growth positive.
But the rebuild would only really crank up once the aftershocks stopped and the insurance market started functioning again, he said.
Labour leader Phil Goff said Parliament now needed to look at whether an earthquake levy was needed, but refused to say whether he would introduce one.
"There are all sorts of things we could face, we expect that the earthquake in Wellington would be the big issue, there are issues in terms of Auckland and volcanic activity," Goff said.
"We need to be properly covered and the Government needs to ensure that that happens in the wake of the Christchurch earthquakes."
While the overall cost was still projected to stay at around 8 per cent of GDP, Treasury has been asked to update its estimate based on the latest information and it's expected the overall figure of $15b will rise.
The increases for EQC announced today were made up of a $2.17b rise on the February 22 quake; a $1.42b cost for the June 13 shake and re-evaluations elsewhere tallying to $430,000.
Initially, it was thought only 12,000 homes had more than $100,000 in damage, but the number was now believed to be about 30,000.
"Quite clearly the scale of residential damage from the 22 February earthquake has been worse than initially thought, with more claims, more damage on a house-by-house basis and greater land damage than expected,'' English said.
EQC chief executive Ian Simpson said while the scale of residential damage was worse than originally thought, EQC would meet all its commitments.
"It is business as usual for EQC," Simpson said.
"This report will not have an impact on EQC's claimants. We will continue to pay out for building, land and contents claims and our full assessment programme will progress with urgency."
EQC had already paid out more than $1.4 billion in claims since September and payments would not stop.