Japan mulls new crisis combat plan
THE Japanese government is considering a plan to launch ''a yen equivalent of Brady bonds'' as a guarantee for the sovereign debt of crisis-stricken regional economies, Eisuke Sakakibara, Japan's vice finance minister, said.
Should the plan materialise, it would help the Thai government to quickly raise foreign financing to support the country's battered economy. The government's planned global bond issue of US$2 billion has been deferred because of the deteriorating international economic situation, shutting out virtually all emerging-market sovereign and private loans.
Thailand's largest foreign creditors are Japanese commercial banks, which are facing significant problems of their own. Japanese firms are also the biggest foreign investors in Thailand.
The country continues to experience net capital outflows owing to calls for loan repayment from international banks. The worsening international economic situation, particularly the ongoing market expectation of a devaluation of the Chinese currency, has raised uncertainty about when the Thai economy will begin to recover.
Sakakibara, or ''Mr Yen'', who is known for his influential comments which can move financial markets, said the measure would not only help defuse the region's economic crisis but also provide a much-needed boost for Asian debt markets.
''I would like to activate the regional debt market,'' he said. ''This could involve some sort of guarantee of sovereign debt, or a yen equivalent of Brady bonds,'' he was quoted as saying from Tokyo by Agence France-Presse.
Brady bonds, launched in 1989 through the Brady Plan, represent a systematic global approach to solving the international debt crisis, with the main thrust of the programme involving securitisation of bank debts.
Under the plan, loans made by the US and European banks to various countries, having become deteriorated credits, are restructured and exchanged for fixed-income securities. The debtor countries are obliged to repay the debt evidenced by the securities, and to date no defaults on these obligations have occurred.
If Japan goes ahead with its plan to combat the Asian debt crisis, it will be a giant step towards stabilising regional financial markets, which have been in turmoil ever since Thailand floated the baht on July 2nd last year. Fears of bank defaults have created a massive outflow of capital from Thailand and the region, which has wreaked havoc on entire economic systems.
Japan is considering Brady-type bonds because the plan will also help Japanese banks, which have maintained the largest credit exposure in the region. The Japanese banking system is in a shambles and will require at least $500 billion in public bail-outs.
Hitoshi Komasaka, general manager of Sanwa Bank in Bangkok, said he was surprised at the announcement by Sakakibara, even though some Japanese politicians had raised the subject in the past. However, he supports the plan, saying: ''It's good. Japan is also facing economic turmoil. We have to avoid a worldwide economic depression. We have to do something.''
As of June 1998, Japan was the largest creditor of Thailand, accounting for $25.26 billion or 50.17 per cent of the total private-sector external debts, according to data from the Bank of Thailand. The US is second with $8.54 billion, or a share of 16.96. France and Germany had exposure of $2.95 billion and $2.70 billion respectively.
As of December 1997, Thailand's domestic debt amounted to $188.7 billion, compared to $52.6 billion for foreign debts. Other crisis-hit countries, such as Indonesia, South Korea and Malaysia, which has recently introduced rigid exchange controls, are also facing a debt overhang which is crushing economic growth, according to Goldman Sachs, the US invetment banking house.
An editorial in Business Week on Sept 7, 1998 supported a plan to alleviate the debt crisis of emerging markets. ''It's time to consider a global write-down. The best way may be to swap emerging-market debt for long-term bonds backed by hard collateral ranging from US and German to Japanese government bonds,'' it said.
Each crisis-hit economy in the region has its own way of dealing with the debt overhang. South Korea has agreed to guarantee all private debts, hence turning private debts into sovereign debts. Indonesia has announced a corporate debt moratorium and is negotiating on a case-by-case basis with foreign creditors. Thailand has also nationalised foreign debts owned by Thai financial institutions. Fears of capital outflow and currency attacks have led Malaysia, which has relatively low foreign debt vis-a-vis domestic debt, to introduce draconian capital controls.
On Thursday the International Monetary Fund (IMF), the Bank of Thailand, the Debt Restructuring Advisory Committee, the 46 foreign banks and 15 local banks, the Association of Finance Companies, the Federation of Thai Industries and the Board of Trade of Thailand signed a broad framework on debt restructuring, called the Bangkok Approach. The fifth letter of intent signed by the Thai government and the IMF also projected completion of the debt restructuring of 200 big corporations.
Japan is on the verge of a deflationary spiral, and the economic crunch will persist into the autumn, Sakakibara was also quoted as saying. ''I don't think the Asian or world crisis is over,'' he said.
Gross domestic product in the world's second largest economy fell 0.8 per cent in the three months to June, an annualised rate of contraction of 3.3 per cent, according to the Economic Planning Agency.
The chances of the Thai economy, an IMF patient, returning to growth during the first quarter of 1999, as has been previously projected, is less likely now because of the turmoil in markets around the globe, according to IMF Director for Asia and Pacific Affairs Hubert Neiss.
''It's possible [that growth in Thailand will return], but the likelihood is not assured," Neiss said in Jakarta. ''A lot depends on the Japanese economy in the next couple of months, and that depends on the policies in Japan. Therefore it's very difficult to predict with certainty when things will move up or start to move up.''
BY VATCHARA CHAROONSANTIKUL AND THANONG KHANTHONG