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Web-only Exclusives
November 30, 2000

From Our Correspondent: Hirohito and the War
A conversation with biographer Herbert Bix

From Our Correspondent: A Rough Road Ahead
Bad news for the Philippines - and some others

From Our Correspondent: Making Enemies
Indonesia needs friends. So why is it picking fights?

Asiaweek Time Asia Now Asiaweek story

COVER STORY - SPECIAL REPORT

A Banking Meltdown?
Asia ponders the ultimate financial disaster

By Jim Erickson and Assif Shameen


IS YOUR BANK SAFE? After their jobs and businesses, the next lifelines devaluation-hit Asians fear for the most are their savings -- and the institutions supposed to safeguard them. As Crisis Part 2 unfolds in earnest this year, deposits entrusted to those fiduciary entities are looking less and less secure than, well, money in the bank. Indeed, people are listening intently for the other shoe to drop -- hoping that the sickening thud of another bank or finance house hitting the floor will be the last.

They might as well be waiting for the sound of one hand clapping, for the regionwide banking shakeout has just begun. From Japanese institutions burdened by $580 billion in bad or doubtful loans, to Indonesian banks reportedly hit by over $2 billion in withdrawals late last year, lenders are hemorrhaging badly. The currency crisis has trebled the burden of servicing foreign loans. High interest rates, a slump in asset values and the economic downturn are driving borrowers to bankruptcy. "Non-performing loans in the banking system are more apparent during times of slower economic growth -- even if the original loan may have seemed viable," says Sanjoy Chowdhury of Fraser-AMMB Research in Singapore.

"How many companies are solvent in Indonesia and Thailand at current exchange rates and with interest rates this high and economic environment this bad?" wonders Robert Zielinski, regional banking analyst with Jardine Fleming in Singapore. As they default, banks restrict lending even further, touching off a new round of failures and defaults. And wagging its finger over the whole caboodle is the International Monetary Fund. It has demanded the closure of dozens of shaky institutions as part of its bailout programs in Thailand, Indonesia and South Korea. The shutdowns have in turn endangered other creditors at home and abroad.

"I actually thought the worst was almost over [for Asian banks] in early December," says Zielinski, but "because currencies have plummeted as far as they have, all bets are off." Under IMF pressure last year, Bangkok shuttered 56 finance companies, and Indonesia 16 banks (though two Suharto family members have resumed operations). Last month South Korea suspended 14 of 30 investment houses. In New York recently, Korean officials and a global skein of creditors agreed to convert $15 billion in overseas borrowings of state banks into Korean government bonds, probably a prelude to long-term rescheduling. European and American banks also bought time with a 90-day rollover of $60 billion in Korean debt. That helped ease fears of Seoul declaring a moratorium on foreign loan payments, which would have torpedoed stock and bond markets in the West.

In the world's biggest morass of bad bank debt, Japan increased yet again its estimate of the amount of delinquent loans crippling its megabanks. The $580-billion figure makes up 12.3% of all their loans -- well above their combined Tier 1 capital -- though the amount thought to be absolutely unrecoverable was $87 billion, or just 1.8% of total bank credit. "It is our firm resolve that neither a [worldwide] financial crisis nor an economic crisis originating in Japan must be triggered," Japanese Prime Minister Hashimoto Ryutaro vowed in his policy address to the Diet on Jan. 12, which he devoted to the banking crisis. The PM has promised $227 billion in direct loans and state guarantees to prop up the Japanese financial system. Government-affiliated institutions also plan to loan $190 billion to solvent but struggling companies unable to borrow from commercial banks.

Yet even those numbers may not prove to be upper limits, especially if bank failures elsewhere in Asia add billions more to the dud IOUs held by Japanese lenders. About 4% of the loan portfolio is lodged in Asia, and these loans "are only now beginning to go bad," says Paul Heaton, an analyst at Deutsche Morgan Grenfell. Japan institutions control nearly 45% of total assets in Hong Kong, most of it grounded in the SAR's slumping property market.

Such links between Asia's turmoil and the centers of global finance is partly why the fall of Hong Kong's Peregrine merchant bank, with $1 billion in liabilities, shook bourses half a world away in New York and London. It failed largely due to uncollectible loans to an Indonesian taxi company (see story, page 26). Now the investment house itself will become largely a writeoff for its creditors, including some of the world's leading lenders. How many more such dominoes are tottering in line is the nightmare of depositors, creditors and banking authorities alike. After all, it was a chaotic America-wide run on the banks that heralded the Great Depression of the 1930s.

That financial Armageddon of six decades ago is the worst-case scenario being cited of late by critics of IMF programs in Asia. A sudden cutoff of liquidity precipitated the wholesale bank collapses of the 1930s, and today the Fund's austerity measures, detractors argue, are doing the same thing to cash-strapped Asian institutions. In addition, the IMF's insistence on sweeping financial restructuring, including bank closures, is compounding the confidence crisis which has collapsed currencies and investment in the region.

Speaking in Singapore last week, a leading Fund critic, Harvard economist and development expert Jeffrey Sachs, said it was the wrong time to shut down banks. And The New York Times quoted a confidential Fund report admitting that the IMF-mandated bank closures in Indonesia panicked depositors and contributed to the rupiah's decimation in the months that followed. (IMF managing director Michel Camdessus denies knowledge of the study, which was reportedly distributed to the agency's officials.)

Fund or no Fund, however, a regionwide banking shakeout is gathering pace, even in economies outside IMF supervision. On Jan. 12, Singapore's Tat Lee Bank and Keppel Bank announced they were merging, and the word on the street is that the Lion City could eventually end up with just a couple of giant institutions. Malaysia's central bank plans to create six large finance companies from the current 39. As for the hardest-hit countries, there is little else to do but sell banks to foreigners, merge them -- or let the weak go bust. Two of Thailand's 15 banks, First Bangkok City and Thai Danu, have agreed in principle to seek foreign controlling shareholders. Korea's lumbering, overstaffed Seoulbank and Korea First are up for sale.

Who will buy? There is a growing outcry that devaluation and austerity will bring economies and banks to such desperate straits that foreign institutions will be able to snap up huge swathes of national financial systems for a song. Or worse: outside entities may shy away even from cut-price Asia, leaving its banks prostrate and its savers wiped out.

The most bloodletting is going on in Indonesia. Lenders in Southeast Asia's largest economy face mounting pressures particularly from gargantuan foreign loans, which have now tripled in rupiah terms. Jakarta plans to merge four of the six state-controlled banks into a single institution. Six entities controlled by businessman Abdul Rizal Bakrie have also announced merger plans. Analysts say proposals involving some 30 other institutions have been submitted to the central bank in recent weeks. The shakeout is long overdue. Indonesia has more than 200 lenders, "far too many for a small economy," says Zielinski.

Preoccupied with fending off short-term calamity, authorities are only beginning to address the endemic shortcomings in the financial sector that led to the wasteful, imprudent lending behind Asia's crisis. IMF-imposed reforms are intended to strengthen bank regulation, improve internal credit controls and reporting, and boost capital, among other changes. "If there are lessons to be learned from the current economic problems in Asia," says Sanjoy, "it is that open and transparent financial systems may help to catch problems early -- certainly, before such problems damage the entire economy."

More important, the IMF changes and the entry of foreign shareholders should help shrink the role that connections and politics play in deciding which enterprises get loans -- a key reason so many billions went to unsound ventures. "Cronyism and favoritism are clearly not in the region's long-term interest," sums up Sanjoy. That you can bank on.


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