Monday, March 21, 2005

Accidents waiting to happen

I noticed an article on Stuff about the poor credit risk that many New Zealand finance company bonds represent. These are the bonds you see advertised on TV and billboards promising interest rates of over 9%.

Generally, when something seems to good to be true, it is. Most global finance companies have access to an international capital market that enables them to borrow at rates substantially less than those being advertised. The fact that these smaller finance companies cannot certainly raises a "red flag" as Standard & Poors put it. Equally, most credit-worthy borrowers can borrow from banks at reasonable rates - the finance companies are lending to those who cannot. Some of this lending is to individuals with poor credit - more worryingly, quite a lot is funding building projects on the edge of viability.

Sooner or later one or more of these companies is going to collapse, and the government is going to be hauled over the coals for not protecting people. They should really do something now and stop highly unsuitable investments being marketed to naive retail investors.

(Oh and another tip - if anyone has a scheme to run cars on a fuel other than petrol don't lend them a cent!)

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