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1998-02-27 16:35:43


Will Asian Banks Make It to the Year 2000?



The Asian banks, like all other banks, are not 2000-compliant. The question is: Can they make it to the year 2000 anyway?

Asia is in a meltdown situation. If the Asian nations begin to default on Japanese loans, the Japanese banks will be facing a disaster.

The pressure on Asian economies is now making it difficult for managers to allocate the money needed to make the y2k repairs. Any discussion of the likelihood of the successful completion of these repairs in Asia must take into consideration the Asian financial meltdown.

If the meltdown spreads from Asia to the United States, which I expect, the same question will apply here.

This analysis is by John Kutyn.

* * * * * * * * * *

A credit crunch of alarming proportions is developing in Japan. Nomura Research Institute's chief economist, Richard Koo, recently said that Japanese financial institutions tried to call-in loans of 30 trillion yen, equivalent to 6% of the Japanese economy. Interest rates have increased - some higher-risk borrowers being asked to pay between 18 and 20 per cent for funds. Additionally, the inter-bank loan market has dried up, causing great liquidity problems for financial institutions. Depositors are moving funds from smaller Japanese banks to foreign banks (Citibank in Tokyo recently ran out of account numbers due to the heavy influx of new customers), and to the larger Nippon banks, or the gigantic Postal Savings System.

Come April 1,1998 Japan's financial system is to be deregulated. This will free-up regulated deposits totaling an equivalent of about U.S.$2 trillion. These funds are sitting idle in insolvent financial institutions. Depositors are receiving a miserly interest of 0.50% per annum. It is widely feared by financial experts that if these funds abandoned these banks, they will collapse. Consequently, some are calling for a delay in financial deregulation. Mr. Yoh Kurosawa, Chairman of the Industrial Bank of Japan, recently said: "It is impossible that all 148 banks would survive. I think that less than 10 banks can survive international competition." . . .

Nippon bank losses reflect much larger losses within corporate Japan. These losses have suffered cancerous growth due to the crisis in South-East Asia. Subsequently, Japanese businesses are facing sharply higher interest rate costs. Moreover, major banks have curtailed lending. And if that weren't enough, Japanese consumer spending is plummeting – December's level declining 5% from last year's level. Unavoidably, massive bankruptcies will soon destroy the Japanese economy. . . .

Bad loans at China's banks now exceed several times bank capital - many state enterprises are incurring substantial losses, and inventories are unprofitably high, and uncontrollably increasing. Unfortunately, spending for new capital formation is not going to solve China's financial problems. They must sell what they produce at a profit… or else. Moreover, they must increase sales to reduce inventories, and must strive to more fully utilize existing manufacturing capacity. ALL THIS can only be achieved by a major devaluation of the yuan. China's economy will implode without a currency devaluation.

It matters NOT if the Chinese hold off devaluation until Japan collapses, because the ramifications of Japan's collapse will so decimate worldwide demand that China will suffer grievous difficulty selling goods at any price. On the other hand, a major devaluation of the yuan will trigger the immediate economic collapse of Japan. Japan's industry cannot tolerate another pricing shock. There are now two things that will trigger the collapse of Japan: Financial deregulation of the country, or the devaluation of the yuan. Should the Japanese deregulate AND China devalue, the collapse of worldwide financial markets will occur within months, if not weeks. . . .

Problems in Indonesia, Malaysia, South Korea and Thailand are well-documented. Taiwan could be the next major trouble-spot -- with domestic borrowings 1.6 times GDP, and two-thirds of bank loans backed by property collateral. Interest rates are rising. Taiwanese companies are slashing prices to compete with Southeast Asia and Korea. And exports fell 26% last month. These are all the disaster signs in a highly leveraged economy.


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