Asia's troubled banking sector looks to foreign money

Asia's troubled banking sector looks to foreign money

By Linda Sieg

TOKYO (Reuters): Asia's financial crisis has prompted more
than its share of finger-pointing but some key points seem clear
-- fixing the problems of the region's banks will be costly,
painful and time-consuming.

And while many of Asia's battered economies are counting on
foreign capital to help restructure their financial sectors, the
success of that strategy has yet to be proved.

In the nine months since the crisis first flared in Thailand,
ensnared South Korea and embroiled Indonesia, debate has raged
over why the "Asian miracle" went wrong.

The region's critics point to a now-familiar litany of lax
surveillance of banks, poor disclosure and "crony capitalism".

Asia's defenders argue greedy and imprudent Western lenders
must share the blame. "People criticize these countries for the
lack of transparency and for 'cronyism'. That may be true. But
the lack of transparency was there for over 40 years and you
can't say you didn't know that," said Kazuo Nukazawa, a former
managing director at Japanese business lobby Keidanren.

"This is a high risk, high return field -- and lots of foreign
lenders came in to lend money," Nukazawa added. The International
Monetary Fund (IMF) has become a lightning-rod of discontent,
with critics charging its prescriptions were both misguided and
counter-productive.

"The IMF is now forcing Asian economic contraction to ensure
that these Asian countries severely cut spending and consumption
so that they set aside sufficient resources to repay western
creditors," said Suchart Thadathamrongvej, an economics lecturer
at Ramkamhaeng University in Bangkok.

"It's like a father bankrupt by gambling mistakes but forcing
his children to take the heat," Suchart added.

Arguments over who is to blame aside, regional economies vary
in the scope of their banking sector woes and the official
response.

Taiwan and Singapore appear to have few of the problems faced
by their neighbors. Thai authorities of late have received praise
for their "vigorous" action, but the nation's banks confront a
huge restructuring exercise.

The OECD (Organization for Economic Cooperation and
Development) and others warn that Hong Kong's financial sector
faces future problems from exposure to equity and property
markets which could yield a hefty rise in problem loans.

Philippine banks are generally seen as relatively resilient
but the sector is still poised for a shake-out and smaller banks
are expected to merge to meet new rules on minimum capital and
higher loan loss provisions.

Investors have been encouraged by South Korea's initial
recovery from the first phase of its crisis, but some analysts
fear a second phase of turmoil may be brewing from potential
defaults on the country's mountains of corporate debt.

Malaysia's financial sector, meanwhile, could suffer a serious
blow if growth there slows sharply, some analysts said.

"The one on the edge of a cliff is Malaysia," said Rob
Subbaraman at Lehman Brothers in Tokyo. "Malaysia's banking
sector is heavily exposed to domestic debt and domestic credit to
GDP ratio is 170 percent. The risk is if the economy slows too
much, that could lead to a wave of corporate defaults."

Skepticism is the byword when it comes to Indonesia, which in
its third agreement with the IMF earlier this month pledged to
accelerate bank restructuring to stop the flow of liquidity
support to banks and regain monetary control.

"The safest thing to say is, if the IMF is twice-bitten and
thrice-shy and is being very guarded about the viability of the
third agreement, who are we to argue with them?" said Graham
Courtney, director of Asian Economics for SBC Warburg.

China, faced with bad loans in its banking sector which may
equal one-quarter of the nation's GDP, has ordered its banks to
cut their bad debt and boost capital while authorities move to
beef up supervision.

And Japan, with Asia's biggest economy, is saddled with a
financial sector challenged by growing competition due to "Big
Bang" reforms, but still bogged down in heaps of bad loans some
eight years after asset prices collapsed -- hardly a source of
encouragement for the rest of the region.

Japan's experience illustrates perhaps all too well the bind
many Asian countries are in -- fixing the financial sector will
be extremely expensive for the real economy, but a failure to do
so promptly could delay real recovery.

"You could argue that one reason Japan has been so slow in
moving ahead with fixing the banking sector is because of the
short-term cost to GDP," Lehman's Subbaraman said.

"But the longer you postpone that, the longer it takes to get
a self-sustaining recovery," he added. "Japan is in a bind and
the others are too, but they may be pushed along faster by the
IMF and because they actually reached a crisis situation."

Several Asian nations hope opening their financial sectors to
more foreign participation will help clean up the mess.
But potential foreign buyers may shy away even at bargain-
basement prices unless disclosure is improved.

"You've seen a number of international banks looking at, say,
banks in Thailand and simply deciding that no reasonable offer
can be made because they don't know what's in there, either
because it's impossible to figure out today technically what is
the value of the assets or because books are not kept in the
proper way," Philippe Delhaise, president of Thomson Bankwatch in
Hong Kong, told Reuters Television recently.

Convincing foreign investors that invitations to enter are
sincere is also vital, some analysts say.

"I think they have got to work very hard to convince foreign
investors to stump up the money required," Courtney said.
"Britain showed you have to say to the foreigners -- 'take me,
take me'."

Necessity, however, may ultimately breed success.

"They have to be very serious (about attracting foreign
capital) because that's the only place they can get the money
from," said Andrew Dermot Fung, regional treasury economist at
Standard Chartered Bank in Singapore.

"No one has the money in the domestic system to take over
ailing banks," he added. "Within a six-month period, we should
have three or four solid deals being made and there will be a
steady trickle after that."