There is of course Japan still, but according to Maurice, it is cheap. Surely the bottom is in place now, and due for recovery, regardless of what is happening elsewhere.
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Japanese banks’ bad loans - Dead, or just resting?
economist.com
Jul 12th 2001 | TOKYO
From The Economist print edition
Suspiciously few loans are counted as truly awful
FULLY committed to painful structural reform: so Masajuro Shiokawa, Japan’s finance minister, promised he was when he met his counterparts from other G7 countries at the weekend. Topping his list of reforms is getting banks to dispose of the very worst of their bad debts, which, under official guidelines, come to around ¥13 trillion ($104 billion). If banks do this, some of their weakest borrowers will be thrown into bankruptcy, with an inevitable and overdue shake-up of ailing, overcrowded industries, such as construction and retailing, to follow.
These ¥13 trillion of loans, to companies now classified by banks as either bankrupt or in danger of bankruptcy, are but the tip of a ¥150 trillion iceberg. With so much talk of serious reform by the government, supporters hope that, at the least, the move will help tackle some of the corporate wounded that must surely have been included in these categories.
In reality few, if any, big borrowers have been placed in these deadbeat divisions. Rather, these categories are stuffed with small and medium-sized companies, whose demise will not badly damage the industries to which they belong. Since banks are bound by confidentiality rules and do not disclose details of individual borrowers, it is impossible to know for sure who is included in these categories. Anecdotal evidence from the large banks suggests that big, wobbly companies have, so far, little to fear from a clean-up of the banks’ bad loans.
In fact, they have been defended to the hilt. Look at Asahi Bank, which is itself in danger of having its “financial strength” downgraded to “E”, the worst possible rating, by Moody’s, a credit-rating agency. Weeks before it had to close its books at the end of March, it was locked in debate with the Financial Services Agency (FSA) over how to rate Aoki, one of Japan’s battered construction companies. In 1999, Aoki had ¥205 billion of interest-bearing debt waived by banks, in return for setting up a 20-year restructuring plan. In March it had that much and more sitting on its books. Like many other construction companies, it is struggling to raise its sales and profitability.
The FSA argued that a 20-year restructuring period was too long to be convincing, and that Aoki should be classified as being “in danger of bankruptcy”. In the end, however, Asahi seems to have won, and Aoki is rated as merely in need of monitoring. Investors disagree. Aoki’s shares are currently trading at around 25% below their face value.
Similar discrepancies abound elsewhere. According to a document leaked to Shukan Bunshun, a news magazine, Fuji Bank, Dai-ichi Kangyo Bank and the Industrial Bank of Japan (IBJ), which have linked up to form the Mizuho Financial group, found some startling differences in their classification of borrowers when they got together. For example, Fuji had classified Hazama, another troubled builder to which it had little exposure, as in danger of bankruptcy. Dai-ichi Kangyo and IBJ, on the other hand, had placed it in a less risky category. As it happens, both banks had lent large amounts of money to Hazama. Now it seems that all three banks, like others in the industry, have decided that, since it recently had a chunk of its debt wiped out, Hazama (whose shares are trading below par) should be considered a “healthy” borrower. Mizuho says that the leaked document is not genuine.
Mycal and Daiei, two struggling supermarket giants, also appear to have been kept out of the worst two categories of debt. Despite persistent talk that they are highly vulnerable, most banks seem to be happy that their debt is secure. The capital markets are less certain. One of Mycal’s bonds, due to mature in 2008, is now priced at ¥33, a third of its face value. Investors would still, in theory, be able to get the full ¥100 a bond if they held on to maturity. That they are scrambling to sell (the price of these bonds has halved in the past two months) suggests they are afraid either that Mycal might not be around in 2008, or that it will default on its debt before then.
Why do the banks seem so optimistic in the face of such market pessimism? One reason is that they cannot afford to be more cautious. Banks have to set aside reserves for only 15% of a loan that is “in need of monitoring”.
Reclassifying a loan as “in danger of bankruptcy” would mean reserving against 70% of the loan instead. The bigger the borrower, the bigger the hit, and some banks, already hurt by a sliding stockmarket, might find it hard to meet capital-adequacy requirements if they reserved more against big borrowers. Others might even be unable to make dividend payments on preferred shares owned by the government—putting them at risk of, in effect, being nationalised.
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