Bank bailouts in Asia add to bond market woe

Bank bailouts in Asia add to bond market woe

CHIANG MAI, Thailand (Dow Jones): Bank bailouts in Asia in the past few years have prompted an explosion of bond issuance, which threatens to compound the problem of underdeveloped debt market mechanisms, according to analysts and some government officials.

Indonesia, for example, has exchanged Rp 573 trillion (US$71.2 million) of new five- and 10-year government paper with banks in order to buy bad loans off their books.

The government debt will start coming due in less than three years, and "once the bonds mature, the question is what is the government going to do?"' Bank Indonesia Governor Sjahril Sabirin said in a recent interview with Dow Jones Newswires.

It can pay them down. But markets will doubt Indonesia's ability to do so since the debt outstanding already amounts to 2.5 times of the country's foreign currency holdings and more bonds are to be issued in 2000, he said.

Alternatively, fresh bonds can be issued in exchange for the old ones. But that could have negative implications for the country's interest rates and currency, the central banker said.

While it wouldn't make repayment too much easier, Sjahril said that making the bonds tradable would at least allow the banks to get some proceeds. Then, their lending could pick up.

And traded bonds would settle at a market-based price, reflecting the distressed level of the debt, which would encourage more corporate-debt resolution, another factor critical to a resumption of economic growth.

With that in mind, Sjahril said that naming market makers to help price and trade the already issued bonds "is something we need to do soon" to lay the groundwork for secondary trading in the debt. He said he is awaiting results of a Bank Indonesia report on this subject.

Indonesia's dilemma was just one of the problems discussed at this year's annual meeting of the Asian Development Bank in Thailand, highlighting how regional bond markets are being restructured in the wake of the financial crisis.

In the lead-up to the meeting, South Korea and Singapore announced initiatives to build up their domestic bond markets.

Seoul, which like Jakarta has exchanged bonds for non- performing loans held by ailing banks, said that banks will be permitted to trade bonds for the first time starting this month. It is also allowing the establishment of bond funds, while the government will issue its own 10-year debt.

The moves in Asia have mostly been related to local currency markets, pointed out Joseph Yam Chi-kwong, Hong Kong Monetary Authority chief executive. And in an interview, he sounded doubtful that domestic currency denominated markets will become liquid anytime soon.

"That channel is pretty choked up. There is not a lot of flow in that market," he said.

Hong Kong has scaled back its own domestic issuance, and Yam concentrated his comments at the ADB on hopes that organizations such as the bank can help provide international bond guarantees.

Asset management companies, which hold bad bank debt in several Asian countries, were much of the focus of attention at the meeting due to expectations they will begin to securitize and sell their receivables. While foreigners will be only limited participants in this process, sale of tradable debt would mark an important step toward resolving the bad loan overhang.

But several commentators said the bond markets remain too underdeveloped for such expectations to materialize. In many cases, steps to encourage secondary trading of debt hasn't kept pace with issuance, and some analysts said they are wary governments may simply let this opportunity to make their bank debt marketable slip by the wayside.

A Standard & Poors Corp. official said one of the primary risks to China's banking system, for example, is that the government will fail to do anything but warehouse debt within its asset management companies.

Mahesh Kotecha, who runs New York advisory firm Structured Credit International Corp., spent the weekend peppering Asian government ministers at the ADB meeting with questions about their plans to move bailout-related debt into the capital markets.

Kotecha said the key is in encouraging bond buying at the retail level. "There isn't any magic to it. You provide a fiscal incentive and people will come," he said, noting that municipal bonds in the U.S. sell because they aren't taxed.

The Philippines is one country that analysts note has begun aiming for the domestic market by selling some tranches of government debt in denominations worth less than $100.