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Japan's banks

Surreal
Apr 18th 2002 | TOKYO
From The Economist print edition


More bad debts, and more tricks for disguising them

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NOT enough to restore the
seriously damaged credibility
of Japan's banks, said
Standard & Poor's, a rating
agency, after the results of
a special audit of 13 big
banks by the Financial
Services Agency (FSA)
were announced on April
12th. Down went Japan's
credit rating yet another
notch.

According to the FSA,
losses from the disposal of
bad loans in the year to March 31st came to ¥7.8 trillion ($60
billion), double banks' operating profits and a fifth more than
targets announced last November. But this is not that reassuring,
because the five-month special inspection, designed to help banks
correctly categorise their biggest problem loans, covered only a
fraction of their total bad debts of about ¥150 trillion. The
regulators, who want banks to dispose of most of their bad loans
over the next two years, have failed to come up with a strategy
to help them do it, including a government injection of capital. Bad
loans have eaten up much of banks' capital, with new dud loans
emerging by the day.

Things could be worse. On April 1st the government lifted its
blanket guarantee on bank deposits. The darker predictions of a
run on banks were not borne out-thanks largely to the
government's frantic efforts to boost banks' equity portfolios, by
propping up the stockmarkets through stricter rules on
short-selling.

Still, banks' efforts to survive the special audit could store up
trouble for the future. The banks were forced to downgrade their
assessments of almost half the 150 big problem borrowers
reviewed in the audit. Some 34 companies were reclassified as
being"in danger of bankruptcy", a category that requires banks to
provision against 70% of the value of a loan rather than only 15%.

However, instead of weeding out the weakest borrowers, banks
are extending fresh financial aid in return for tepid reforms by
borrowers which, in turn, allow banks to bump up downgraded
companies into healthier categories of borrowers. Of the dozen or
so big construction companies in trouble, only three have gone
under since the government announced a renewed commitment to
reform last year. The rest limp on, with ever more help from banks.
For instance, Sumitomo Mitsui Bank, which is trying to get a trio of
troubled builders to merge, is expected to sweeten the deal by
offering more financial aid.

Worse, banks have hit on a formula for
turning bad debts into shares and hiding
them in their equity portfolios.
Debt-for-equity swaps enable banks to
exchange a portion of their loans to
heavily indebted companies for ordinary
or preferred shares. This helps to lower
banks' bad-loan totals, even though their exposure to borrowers
remains unchanged. Unlike debt forgiveness, which creates losses
for banks as they write down bad debt, debt-for-equity swaps
cost nothing at all. What is more, since the dud borrowers now
have less debt, banks can reclassify the rest of their loans and
reduce reserves set against them."For bank managers,
debt-for-equity swaps are a magic wand," says Hironari Nozaki of
HSBC Securities.

Weak construction companies that have already had chunks of
their debt waived in the past are likely to be the biggest
beneficiaries of debt-for-equity swaps. Banks fear a backlash from
shareholders if they offer any more debt waivers. Consider Haseko,
a wobbly construction company that received a ¥355 billion debt
waiver in 1999 and yet is still struggling to repay ¥540 billion of
debts. Banks are planning to swap ¥150 billion of Haseko's debt for
ordinary and preferred shares. Yet executives at Haseko are
thinking of slashing shareholders' equity in the next three years, a
move that would wipe out much of the value of the swapped
ordinary shares. In other words, the scheme could end up merely
as a more risky and opaque form of debt forgiveness, taking place
in two stages rather than one.

The biggest reason that dud loans are not simply being written off
is that banks are running out of money needed for large write-offs.
Banks are badly undercapitalised. Officially, the big banks have
about ¥19 trillion of core capital, meaning capital-adequacy ratios
of about 10%, easily above the 8% ratio that international rules
require. But, say analysts, a more prudent assessment would
subtract public funds received four years ago, deferred taxes, and
"profits" from property revaluations. That would leave the banks
with only some ¥5 trillion, or an average capital-adequacy ratio of
about 2%.

The minister in charge of financial reform, Hakuo Yanagisawa,
denies that banks need any more injections of public money. With
fresh losses uncovered by the special inspections, banks have
therefore scrambled to raise new capital, mostly from borrowers.
This leads to double-gearing, with banks and their equally weak
borrowers propping one another up by holding each other's shares
or debt. The practice raises the danger of a single bankruptcy
triggering others. Especially worrying is the relationship between
banks and life insurers, which are also in dire financial straits.
Mitsuhiro Fukao, a professor at Keio University, reckons that by
last March banks had lent life insurers at least ¥2 trillion; and life
insurers had lent banks about ¥5 trillion and held an equivalent
amount of bank shares. This means that a bankruptcy of a big life
insurer, which may not be far away, could bring down some of the
banks, or vice versa.

That special inspections were needed at all has undermined the
credibility of previous inspections-and of the regulator that
conducted them. Just over a year ago, the FSA had suggested to
one mid-sized bank, which had increased its bad-loan reserves and
so created large losses, that it was being a little too aggressive in
its clean-up. The FSA has now changed its tune, albeit not
enough. A recently leaked memo from the Ministry of Finance and
the FSA concentrates on how to present the banks' bad-loan
problems to the public, and on how to manipulate stockmarkets.
Bureaucrats, it seems, are still intent on fiddling, rather than
tackling the roots of Japan's financial problems.

Quelle: Economist


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(Adds resignation in paragraph three)
By Linda Sieg
TOKYO, April 19 (Reuters) - Japanese Prime Minister Junichiro Koizumi's scandal-tainted ruling party suffered a new blow on Friday with the resignation of the speaker of parliament's Upper House over allegations that an aide took kickbacks.
The affair is the latest in a rash of scandals in the Liberal Democratic Party (LDP) that have sparked a slide in Koizumi's popularity ratings -- his main weapon against LDP old guard rivals who oppose his agenda for economic and political reforms.
Upper House speaker Yutaka Inoue -- who has denied the allegations -- resigned from his position as speaker after threats by opposition parties to boycott business in the chamber.
Inoue, in a closed-door session with ruling and opposition lawmakers on Thursday, denied allegations by a magazine this month that an aide had received hefty kickbacks from a construction firm in connection with a public works project.
Top government spokesman Yasuo Fukuda told a news conference that the impact on parliamentary business could not be ignored.
"We expect the Upper House to make every effort to avoid confusion," Fukuda said, before Inoue resigned.
LDP Secretary General Taku Yamasaki told a news conference the decision on whether to resign had been up to Inoue, but media said Upper House heavyweight Mikio Aoki had met Koizumi to discuss the issue.
Koizumi soared to power one year ago, buoyed by promises to clean up the long-ruling party and revive the stagnant economy.
But doubts over his commitment to reform, the sacking in January of his popular foreign minister and the LDP scandals have slashed Koizumi's ratings in opinion polls to close to 40 percent from the heady 90 percent seen when he first took office.

SCANDAL MENU
Japanese voters have been treated to an almost daily diet of scandals since Koizumi sacked the controversial Makiko Tanaka as foreign minister to end a feud with diplomats and their LDP backers that had threatened the enactment of the state budget.
Even Koizumi has not been immune from attack by tabloids whose content consists largely of gossip, sex and scandals.
The prime minister last week flatly denied allegations that his brother, who serves as his private secretary, had been involved in shady deals while working for a consulting company.
Earlier this year, LDP heavyweight Muneo Suzuki was forced to leave the party over allegations that he had meddled in the awarding of government aid projects.
Pro-reform lawmaker Koichi Kato, a long-time Koizumi ally and former LDP secretary-general, was forced to quit the party and parliament over the alleged misuse of public funds and the arrest of a former aide accused of tax evasion.
Former Foreign Minister Tanaka herself is also in the scandal hotseat, but has strenuously denied media reports of misuse of public funds provided to pay the salary of an aide.
The scandals are eroding support for the LDP among voters who were lured back to the party by Koizumi's maverick style.
A ruling coalition-backed candidate lost a local election to an independent late last month and two parliamentary by-elections on April 28 will provide more clues to electoral fallout.
"The elections will be an important watershed," said Shigenori Okazaki, a political analyst at UBS Warburg.
"If they lose one, maybe that's okay. If they lose two, Yamasaki will be vulnerable and that will weaken Koizumi."
(Addition reporting by Ami Miyazaki)
((Tokyo Newsroom +81-3 3432 8018
tokyo.newsroom@reuters.com))



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