Fran‡ois, our banker friend continues his analysis:
OPEN QUOTE:
To understand the world financial situation is to understand the difference between reality and illusions of reality. It is to understand that the basis of all financial failures is the inability to pay debt. Debt is repaid from income or profits. When income or profits are insufficient to repay debts, default occurs. Occasionally, new debts are provided to repay old debts, but this will only increase total debts and future losses.
Since 1990, the world has witnessed a large economic expansion in the USA and explosive growth in South East Asia and China. Within Japan, short term interest rates were decreased to .5% and the government initiated the largest fiscal stimulus program the world has ever seen.
Has anyone questioned why the second largest economy in the world,
...with all of its major trading partners having sustained growth,
...with the lowest interest rates the world has ever seen,
...with the largest fiscal stimulus package the world has ever seen, has not grown and now the economy is contracting at an annual rate exceeding 11%?
To begin to answer this question, one must return to pre-bubble Japan, when the Nikkei was near 40,000; when land values at Ohtemachi and Toranomon in central Tokyo would have bought all of Canada or all of California, and when Tokyo was worth more than the United States. On the basis of these valuations, trillions of dollars were lent by the Japanese Banks, making them some of the largest corporations in the world. These loans were not supported by the income of the borrowers, but by the assets they pledged for security.
Today, the Nikkei is below 16,500 and dropping, and commercial land prices are down 70% and dropping. The loans are still outstanding, but with borrowers unable to repay loans from income and realizable asset values far below loan values, these loans remain on the books as the losses on these loans likely far exceed the banks capital.
The size of total losses is unknown. However, during Nov 95, Japan's finance ministry announced non-recoverable loans at the Osaka based Kizu Credit Co-operative were 960 billion yen, representing more than 70% of total loans. A further 230 billion yen were thought to be doubtful, leaving less than 10% of Kizu's loans as performing assets.
Does this tell us anything about how the balance sheets of the large banks really look? The loss of net worth represented by the collapse of the Japanese stock & real estate markets represents many trillions of U.S. dollars. At the height of the bubble, Japanese land values were estimated to be between 16 to 20 trillion US dollars. A 70%
decline represents a $11 to $14 trillion dollar loss in the real estate market alone. When the banks start selling real estate to repay bank loans, look for the market to drop even further.
Add this to the losses totaling trillions of US dollars on the stock market and the potential loss exposure of the Japanese banks is staggering.
When the bubble in Japan burst and banks were facing massive loan losses and negative growth prospects, a new source of revenue had to be found. This led to a large increase in lending to South East Asia which helped fuel a bubble in these economies. In addition, exposure to derivatives increased to trillions of dollars.
We have recently seen the bubble burst in South East Asia which will further add to the loan losses the banks cannot report as they do not have the capital to do so.
It is estimated that when the Nikkei dropped below 16,500 many banks capital fell below 8% minimum required by Japan's Finance Ministry. This does not include the losses on loans to the Japanese and South East Asia bubbles that are real, just not reported.
When the Japanese bubble burst, the Japanese government began a series of fiscal and monetary stimulation to get the economy restarted. Total government debt rose to between 87% to 89% of GNP at the end of 1996 and could be as high as 97% of GNP by the end of 1997. The government budget deficit has been running over 7% of GNP. Significantly, despite record low interest rates, interest payments now absorb over 60% of total tax revenue.
In addition, there is Japan's Fiscal Investment and Loan Program, a system that draws money from public pension and postal-savings systems and lends to 57 government agencies. (ed note: Don Green was trying to address this in one of his recent postings on this thread.) Total borrowings are about 374 trillion yen, and when combined with official borrowings could see Japan's debt inflate to 150% of GNP.
Japan's life-insurance industry reportably holds 25% of the U.S. $ 12 trillion dollars in household savings. As highlighted by the failure of Nissan Mutual Life Insurance Co., this industry is also in need of a life line. When Nissan Mutual collapsed, liabilities exceeded assets to such a degree, the industry's entire 200 billion yen emergency reserve covered only 2/3 of the loss. These companies have promised returns as much as 5.5% while earning only 2.9% on investments in 1996.
For 1997,with bond interest rates decreasing & the stock market declining, returns on investment will likely fall below 1996 levels.
Despite near invisible interest rates and hugh fiscal stimulus programs, the Japanese economy continues to implode, contracting at a rate exceeding 11% in the last reported quarter. Problems will only increase with the financial turmoil in South East Asia where 44% of Japanese exports go.
The ? no one dares ask is: what does the Japanese government do?
The economy is imploding,
government direct and indirect debt is 150% of GDP,
the government budget deficit is large and unsustainable,
and the banks and life insurance companies appear to be insolvent & will need substantial capital infusions to remain viable.
The answer is that the Japanese government cannot repay present loans and that borrowing additional funds to bail out the banks and insurance company's will only speed the road to bankruptcy.
The banks are large holders of government debt, and while it could be argued that the government could borrow even more money from the banks and then turn around and give this money back to the banks to improve their equity positions, this simply amounts to transferring debt and does not address the central issue that neither the banks or the government are financially solvent.
In fact we have the situation
where an insolvent government
is borrowing from insolvent banks
who in turn rely on the backing from the insolvent government.
Loans now far exceed the capacity of debt repayment, and compounding interest and an imploding economy will seal their fate. Basically, it is simple mathematics.
How long will this continue? Like any bankrupt person, until the credit cards are cut off.
It is important to realize this (level of bankruptcy) will take much longer than in a normal commercial (bankruptcy) situation. Japanese banks must be willing purchasers of Japanese government bonds at all times, regardless of fundamentals. Should a government default on its debt, the value of its currency which reflects the credit of the government must approach zero.
Currency is simply another unsecured promise to pay, and currency issued by a bankrupt government will have no value.
Generally speaking, the bank's assets are financial(currency based) and will also fall to zero if the currency collapses. The banking & financial industries are dependant on a functioning government bond market. It is for this reason that governments which are insolvent can continue to borrow.
END QUOTE for the momento...
Regards,
O/49r |
