Tarrin sees four fallacies in an AMC
February 2, 2001
BANK stocks have been soaring sharply since the decisive election victory of
the Thai Rak Thai Party, which has pledged to form a national asset management
company to bail out the banks. Of course, the staunchest opponent of a national
AMC is Finance Minister Tarrin Nimmanahaeminda, who would have established one
if he believed that this was the right method to tackle the bad debts in the
banking system.
To Tarrin, there are a number of fallacies associated with a national AMC
which would not lead to an expansion of bank credit but rather create a heavier
debt burden for the country.
"The first fallacy is that once the national AMC has bought the bad
debts from the banking system, the banks will launch a lending spree. That will
not happen," Tarrin said in an interview. Bankers from Chulakorn
Singhakowin of Bank of Asia to Banthoon Lamsam of Thai Farmers Bank appear to
support this view. Even if all bad debts were taken off their books, they would
still be unwilling to lend because of a lack of good customers.
Although banks would have more capacity to lend, they would be unwilling to.
Lending is a complex issue, depending on the overall health of the economy and
other factors. "Don't mix up the capacity to lend with the willingness to
lend. They are different," Tarrin said.
The second fallacy is that the AMC would treat all parties fairly. Tarrin
said the biggest question facing the AMC was what price it would pay for the
transfer of the banks' bad assets. If the transfer price is set low, it would
benefit the bankers and their shareholders. If the transfer price is high, the
taxpayers would benefit.
The third fallacy is that the AMC would be more effective because it would
bring all bad debts under one roof. "Managing the national AMC will become
a big problem in practice," Tarrin said. "For if it is a state
enterprise, the people running it will be treated as civil servants. Normally
civil servants do not dare to make decisions. They are rather inert in tackling
problems. It will also be susceptible to corruption. It's better to let the
private sector go after the debts."
The fourth fallacy is that the AMC would speed up debt restructuring.
"On the contrary, it might create a moral hazard because most of the
debtors would like to have their debts transferred automatically to the AMC
rather than keeping their debts at the banks, which are tougher to deal
with," Tarrin said. "In the national AMC, the debtors would not have
an incentive to repay. The problem might spread out to affect the stability of
the financial system."
In Malaysia, Prime Minister Mahathir Mohamad set up a national AMC shortly
after the banking crisis. But it was accompanied by the passage of dual-track
legislation to cope with the debt restructuring. Debtors forced into the
national AMC are squeezed by the authorities, so their incentive is to try and
reach a restructuring deal with their creditor banks.
Tarrin said in Thailand, which has a different political and judicial
structure, it is impossible to introduce legislation similar to the Malaysian
model. That has complicated debt restructuring, which must be supported by a
stronger judicial framework.
Moreover, once the debts are transferred to the AMC, it would be difficult to
restructure them because some debtors need further financing from the banks. The
creation of the AMC would not ensure debtors could get a credit line from the
banks to restore their businesses.
So far Tarrin has relied on a mixed strategy to deal with bad debts, from
auctioning off the bad assets of 56 defunct finance companies, official
intervention to merge weak banks and making available official capital to help
the remaining banks re-capitalise. Private banks are encouraged to set up their
own AMCs to deal with their debtors. The government has also formed a Corporate
Debt Restructuring Advisory Committee to mediate the talks between creditor
banks and debtors.
"We have done quite a lot in bringing down the bad debts, which were
around Bt2.5 trillion. Now they are about Bt1 trillion," Tarrin said.
However, Thai Rak Thai is expected to go ahead with forming the AMC as
promised during the election campaign. Yet most people believe it will take at
least six months before it is up and running.
It represents a comprehensive way to deal with bad debts once and for all.
But along the way, it's going to be an arduous task to sort out the huge garbage
pile in the Thai economy's backyard.
BY THANONG KHANTHONG
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