Hi August,
Yes, the Argentinians most definitely have their financial backs to the wall so to speak. The Japanese aren't faring any better as these two articles show...
news.ft.com pacific
Japan seen as poised to fall into recession
By David Ibison in Tokyo
Published: August 30 2001 19:05GMT | Last Updated: August 30 2001 19:16GMT
A decline in industrial output, weak retail sales figures
and a new round of industrial job cuts has reinforced
growing fears that Japan was poised to fall into its fourth
recession in a decade.
Thursday's news helped push Japan's Nikkei 225
benchmark stock market index even further below the
11,000-point level to a 17-year low of 10,938.
The Ministry for the Economy, Trade and Industry said industrial production fell 2.7
per cent in July, outpacing earlier forecasts and the fifth consecutive monthly
decline. Retail sales for the month also dropped 2.7 per cent, their fourth
back-to-back monthly drop.
Kyocera, an electronics company, said it would reduce its overseas workforce by
10,000 by the end of the year while Oki, a telecommunications company, said it
was aiming for a 10 per cent reduction in its workforce over the next two years.
The figures add weight to the widely-held belief that GDP data for the April-June
quarter to be released on September 7 are likely to show the economy has
contracted.
The combination of a strong yen and weakening demand in the US has
undermined Japan's export-oriented economy. The economy narrowly avoided a
contraction in the first quarter but policy-makers and private sector economists
agree that the country cannot avoid recession.
The continued bad news will add to the pressure on the government to take action
to stimulate economic growth.
But Junichiro Koizumi, prime minister, on Thursday refused to give in to the
growing pressure to alleviate the pain afflicting the economy. He has promised to
press on with structural reforms despite short-term difficulties. "We must not
change our course - no reforms, no growth," he said.
Nevertheless, there are mixed signals over possible policy responses. Some in
the administration appear to favour a weaker yen, others favour an easier
monetary policy, some favour a large supplementary budget while others press
for the implementation of speedy structural reforms.
The pressure to weaken the yen intensified on Thursday after Takashi Imai, the
head of Keidanren, a powerful grouping of business leaders, stated publicly that a
firmer yen would be "bad for the economy".
The combination of Japan's recession and the start of Mr Koizumi's reforms has
already seen the unemployment rate rise to a record high of 5 per cent in July.
news.ft.com
Japanese bad loans become worse under Koizumi regime
By Gillian Tett in Tokyo
Published: August 30 2001 18:47GMT | Last Updated: August 30 2001 20:30GMT
When Junichiro Koizumi was swept to power five months
ago, the stock market surged in delight at the prospect of
a reformist prime minister. This week, it told a different
story.
On Wednesday the Nikkei 225 fell to its lowest level
since 1984, after Hakuo Yanagisawa, financial reform
minister, admitted that Japan could take until 2007 to
resolve its bad loans. If true, this would be three years
later than Mr Koizumi had promised - and nearly two decades after problems with
the country's banks emerged.
What makes Japan's banking problem so serious is not just the absolute scale of
bad loans but the country's apparent inability to overcome them. Although
Japanese banks have made more than Y70,000bn (£403bn) in write-offs since
1992, bad loans continue to appear.
Mr Yanagisawa blames this on macroeconomic problems such as "recession" or
"deflation". Indeed, figures out next week are expected to show that the economy
officially entered recession this year. But many believe the main problem is at the
micro level - the way Japanese banks define the loans.
While about 5 per cent of banks' loan portfolio is unquestionably "bad" and cannot
be repaid, a significant amount - about Y79,000bn, according to the banks' own
data, or 11 per cent of their loan portfolio - is classed as neither good nor bad.
Typically, these "grey" loans consist of those made to companies that are still
paying interest and have some viable operations but that also maintain many
unviable operations and are so highly leveraged that they appear unlikely ever to
be able repay the principal.
Anglo-Saxon logic suggests that the best way for banks to tackle this kind of loan
is to demand corporate "restructuring" - separating out the viable and non-viable
parts of a business, then writing off part of the debt to create a healthy company.
Yet in Japan there is a deep cultural dislike of separating winners and losers -
banks are reluctant to "offend" traditional borrowers. Bankruptcy has been
considered so shameful in Japan - in contrast to the US - that executives almost
never voluntarily seek restructuring.
Interest rates compound the problem. "Interest rates are so low that the ability to
pay interest is no real guide to a company's health," argues David Atkinson,
analyst at Goldman Sachs.
The result is that most banks simply put off taking action. "Most banks just tend to
leave things to get worse and worse, so a chapter 11 situation turns into a chapter
seven [outright bankruptcy and liquidation]," says Tomoo Tasaku of PwC. "They
act only when there is no other choice. And that costs more in the end."
There are some signs of changing attitudes. Sumitomo Bank, for example,
recently sold the troubled sports group Victoria to Jafco, the private equity group,
which separated out the viable and non-viable businesses. Bank of Tokyo
Mitsubishi imposed a restructuring plan on Kanematsu, a leading company.
Even so, the banks have a severe shortage of skilled staff to oversee restructuring
plans. In Kanematsu's case, for example, BTM devoted 20 top staff to the problem;
but it still has thousands of smaller troubled borrowers - and just 400 credit staff.
Some economists argue that a better solution would be to take the problem away
from the private banks. James Fiorillo, analyst at ING Barings, says the banks
could hand over their grey loans to a government- controlled asset management
company, which could take culturally awkward decisions more easily.
But while this approach worked well in Sweden, the risk in Japan is that state
involvement might create even more paralysis. Two years ago, for example, Japan
created the Resolution Collection Corporation, a government body, to dispose of
banks' bad loans. Now it is turning to grey loans too. But the RCC has no skills in
corporate restructuring. Furthermore, it has repeatedly refused to sell its loans in
an open market to achieve a clearing price. "Our mission is to minimise the loss
to taxpayers," says Nobuhiro Takahashi, RCC general manager. "We think we can
do this by collecting [them] ourselves, rather than selling them in markets."
An alternative is for the banks to sell their grey loans to foreign distressed debt
funds. Unsurprisingly, perhaps, this course of action is supported by foreign
bankers, which have been assembling pools of capital for such trades. It also has
one clear advantage: distressed debt funds could take a "tough" approach, free
from cultural baggage.
Some of these sales have already taken place. In 1998 and 1999, foreign
distressed funds such as Goldman Sachs, Morgan Stanley, Cerberus and
Lonestar spent an estimated $10bn (£7bn) on distressed loans in Japan. But they
have tended to include only the bad loans where the banks have already severed
ties with borrowers. Cultural factors have again proved a serious obstacle to
selling off grey assets. "We would prefer to deal with these problems ourselves,
so we don't damage client relations - that is the Japanese way," says the
president of one of the largest banks.
More importantly, perhaps, the sale of grey loans would force banks to recognise
new losses because they have under-provisioned for these loans. And most
banks do not have enough capital to absorb new, large losses.
As a result, the sales of banks' distressed debts have almost dried up in recent
months. "The banks like to pretend that sales have stopped because there is no
demand from US investors but that is rubbish," says one of the most active US
distressed debt investors. "The problem is a lack of supply because the banks
cannot take the losses."
Optimists hope that Mr Yanagisawa's comments this week are intended to pave
the way - and prepare public sentiment - for more injections of public funds into
the banks. Other government officials are pinning their hopes on legislative
changes that might make it easier to restructure "grey" borrowers.
Yet unless the economy recovers suddenly, the government adopts a more
aggressive reform path or interest rates rise - all unlikely in the short term -
change will be slow. Indeed, as many observers note, Mr Yanagisawa's 2007
prediction for an end to the problem of bad loans looks too optimistic.
KJC |
