New York Times - 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 largest, 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 -- that 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 or 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 are 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 at 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 Commercial
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
to 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 island 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. |
