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."