[PEN-L:374] A trillion dollars in bad debts

[Louis Proyect <lnp3@xxxxxxxxx>]

July 30, 1998

Japan's Bad Debt Is Now Estimated Near $1 Trillion

By DAVID E. SANGER

WASHINGTON -- American officials and private financial experts evaluating
the depths of Japan's banking crisis have concluded that it is far worse
than Tokyo has publicly acknowledged, with bad debts approaching $1
trillion, or nearly twice the official estimate.

American officials and outside experts caution that their estimates are
extremely rough, in part because Japanese banks have been using accounting
tricks to hide those debts that are not being repaid.

The higher figures greatly complicate the challenge facing Keizo Obuchi,
the man set to become Japan's new prime minister on Thursday, these
officials say.

Obuchi has little experience in the financial sphere and has offered only
the vaguest of plans about how he will deal with what appears to be the
largest banking crisis in history.

Wednesday, however, he persuaded an elder statesman, former Prime Minister
Kiichi Miyazawa, to become finance minister -- placing the 78-year-old
politician, a fixture in American-Japanese relations for four decades, at
the center of the financial storm.

The new estimates suggest that bailing out the Japanese banks, which
include some of the world's st, could cost Japanese taxpayers far more than
the $214 billion that Tokyo has set aside.

The government has declared plans to establish a "bridge bank" that would
assume bad assets from the commercial banks and sell them off, presumably
for a fraction of their value; the weak lenders would be closed or merged.
The cost to taxpayers, some officials believe, will need to double.

The Clinton administration and Wall Street have long assumed that the
Japanese were understating the problems they face. Officially Japan has
said that its banks currently hold around $550 billion in bad debt,
although in recent weeks that figure has crept up to closer to $700
billion, Japanese officials said. The far greater scale of the problem, and
cost of fixing it, could make it harder for the new Japanese government to
act decisively.

The size of Japan's bad debts may well be the most important statistic in
the Asian financial crisis. Since the crisis struck, Japanese banks have
become so beleaguered that their lending at home and elsewhere in Asia has
all but halted, and they are closing many of their offices throughout the
region. This has contributed to a scarcity of credit that has worsened the
recession -- in some places the depression --  stretches from South Korea
to Indonesia.

The United States is concerned for several reasons: exports to Japan have
plummeted, and the Japanese banking crisis is hampering the effort to
rescue other Asian nations which are heavily dependent on trade, investment
and borrowing from Japan.

American officials say they have not conducted any formal study of Japan's
banking troubles, and they almost never discuss it in public, for fear of
scaring even more investors away from the Japanese markets.

Some argue that the overall debt figure is both unknowable and less
important than the cost of closing  merging some of Japan's largest banks.
Because even bad loans have some value, most experts say that the cost of
cleaning up the books will probably be only 60 percent to 70 percent of the
bad loan portfolios.

The $1 trillion figure is being floated around during meetings at the White
House, the Treasury and the Federal Reserve, and appears based on new
estimates from Japan, unofficial estimates from investment bankers on both
sides of the Pacific and anecdotal evidence of how Japanese banks have been
performing sleight-of-hand to avoid a true accounting.

For example, some banks are reported to be quietly lending even more money
to apparently insolvent companies that have been long-time customers. The
companies, in turn, are using the new loans to pay back interest on overdue
loans that would otherwise be in default. As a result, the banks are able
to report to authorities that their loans are being repaid -- even though
the new loans they are providing only deepen the the problem.

"The numbers are hard to pin down because the banks go to such lengths to
hide the bad news," said Richard Medley, managing partner of Medley Global
Advisors, a private research firm in New York that often consults with top
American officials about the Asian crisis.

But referring to the savings and loan crisis in the United States of a
decade ago, he said, "if you add up what the Japanese have admitted, and
look at the usual margin of error in the American S&L crisis and similar
crises, you get to a trillion very fast."

One senior administration official, who declined to be identified, said,
"What's become clear is that Japan is going to need to spend tens of
billions more in public money to get out of this mess, and they  going to
have to take some banks out of their misery."

By comparison, the cost of resolving the bad debts generated in the
American savings and loan crisis of a decade ago were roughly $160 billion,
in an economy that in 1990 had a gross national product of $5.74 trillion.
The cost amounted to about 2.7 percent of the economy's annual production.

If Japanese taxpayers spend upwards of $500 billion to rescue their banks
-- and that may prove to be conservative -- it will exceed 12 percent of
the country's GNP.

And that is only part of the problem. Most experts believe that losses in
the life insurance industry could amount to another several hundred billion
dollars. Like the banks, the insurance industry relied on a property market
that turned out to be wildly overvalued.

"The concern is that if you are spending so much to clean up your banking
system, it takes a real whack  the economy," said Bert Ely, a financial
consultant who was deeply involved in evaluating the American savings and
loan crisis.

Japan is hardly the only country in Asia mired in bad debt. In Indonesia,
most domestic companies have simply stopped repaying loans, and the banks
are working out details of a delay in paying back overseas lenders. Many of
those lenders are Japanese.

And American officials are increasingly focusing on banking troubles in
China. Moody's Investors Service said Wednesday that it had placed its
ratings of nine Chinese banks on review, to determine if it should
downgrade its assessment of their credit worthiness.

Among the commercial Chinese banks under review are four of the largest
state-owned institutions: the Agricultural Bank of China, the Bank of
China, China Construction Bank, and Industrial and mercial Bank of China.

A collapse in China could slow the nation's already-stumbling economy. And
a slowdown would worsen unemployment and threaten many of the economic
reforms that President Clinton celebrated on his trip  China a month ago.

But it is Japan's ability to deal with its huge banks that most worries
American officials. Treasury Secretary Robert Rubin sounded that note anew
Wednesday in an interview on CBS, urging the new Japanese government to
move quickly on a range of problems, including stimulating the economy and
rapidly deregulating long-protected corners of the economy.

No one knows exactly how big the problem is because Japan's audits of its
banks have been almost comically insufficient. American officials
frequently note that Japan has about 400 bank inspectors; the United States
has about 7,000.

What the markets are watching now is how Obuchi, and the newly-appointed
Miyazawa, go about the painful process of dealing with the banks -- which
may, in the short term, result in more corporate bankruptcies and higher
unemployment.

The tentative steps taken so far have failed. Japan closed one insolvent
major bank, in the northern  of Hokkaido, late last year. The local economy
immediately fell deeper into recession, and Japanese officials argued in a
recent visit to Washington that the experience showed that closing banks
could do more damage than merging them or attempting to keep some open.

Moreover, there is rising concern that the government's reluctant decision
to use taxpayer money to bail out the banks is going astray. Some of the
first money was used to keep insolvent banks afloat, simply prolonging
their bad-loan problems.

Japanese bankers say that other banks decided not to sell off bad loans
because they thought they would get a better deal selling them to the
government than selling them on the open market.

"All this did was make the problem worse," one senior Japanese banker said
on a recent visit to the United States.

Copyright 1998 The New York Times Company


Louis Proyect

(http://www.panix.com/~lnp3/marxism.html)