BANKING CRISIS CONTINUES; STILL NO EFFECTIVE

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000214

SIPDIS

STATE FOR EAP AND EB
TREASURY FOR OASIA
CDR PACOM FOR FPA

E.O. 12958: DECL: 02/18/2013
TAGS: EFIN BM
SUBJECT: BANKING CRISIS CONTINUES; STILL NO EFFECTIVE
GO0VERNMENT ACTION

REF: RANGOON 213

Classified By: CDA, a.i. Ron McMullen. Reason: 1.5 (d).


1. (C) Summary: Burma's banking crisis has continued to build
in the absence of government action. Several private banks
have effectively closed, while the Myanmar Bankers
Association has agreed to further reduce the limits on
withdrawals to only 200,000 kyat (i.e., $200) per account per
week. Government banks have continued to operate normally,
but their deposits represent only a small fraction of the
entire banking system's. Moreover, even their operations
have been interrupted to a degree by the problems at the
private banks. End Summary.


2. (C) Burma's banking crisis continued unabated on February
19 in the absence of any effective government response.
While the Central Bank has reportedly extended emergency
credits to several banks and brought in several truckloads of
bills to meet the banks demands for cash, the government
itself has still not issued any statement regarding its
intent to support the private banks. Some of the
government's steps have even been counterproductive. On
February 17, the government instructed Myawaddy Bank, which
is affiliated with the Myanmar Economic Holdings Limited
(MEHL),to transfer all official government and military
accounts to the Myanmar Economic Corporation's Inwaa Bank.
This order had nothing to do with the banking crisis; it was
essentially precipitated by MEHL's fall from grace as the
favored military corporation in country. Nevertheless, 5
billion kyat in deposits crossed the street, putting the
joint venture Myawaddy Bank in trouble along with the private
banks.


3. (C) As might be expected under these circumstances, lines
have continued to form in front of all the private banks,
forcing several to effectively close. Meanwhile, the Myanmar
Bankers Association (an unoffical grouping of private
bankers) agreed on February 18 to further reduce the limit on
withdrawals from 500,000 to 200,000 kyat (i.e., about $200)
per account per week. There are also increasing signs of
payment problems, in part because some of the steps taken by
the private banks ostensibly to slow withdrawals (e.g., a ban
on account transfers even between branches of the same bank).
That ban may facilitate controls on withdrawals, but it also
makes it nearly impossible for any company to do business.


3. (C) Thus far, fortunately, only private banks have been
affected by the crisis. Government-owned banks such as
Myanmar Economic Bank, Myanmar Investment and Commercial
Bank, and the Myanmar Foreign Trade Bank have all continued
to operate normally without restrictions on withdrawals.
However, even they have been affected in cases where they
have to arrange settlements through the private banks. For
instance, MFTB regularly redeems foreign currency by
crediting the customer's kyat account at a local bank. With
private banks shutting down and limiting withdrawals,
however, few customers want to see their accounts credited
with any amount of kyat. Moreover, the relative confidence
people seem to have in government-owned banks does not
reflect the quality of their operations. Rather, the public
appears simply to believe that the government is far more
likely to stand behind its own banks than the private banks.


4. (C) Finally, observers are increasingly sensitive to the
potential political consequences of this crisis. One of the
best economic correspondents in country believes that
mismanagement of this crisis could signal the beginning of
the end for this government, or at least its current economic
policy. On February 18, he received "a panicky call" from
the Office of the Chief of Military Intelligence asking him
to do an options paper for GOB review. He has recommended,
he said, government guarantees of deposits scaled to the size
of deposits (e.g., 100 percent for small depositors and
running down to zero for those over a certain limit). He has
also recommended triage for the troubled banks, though
whether the government has the capacity to pick the good
banks from the bad remains to be tested.


5. (C) In short, the public is now waiting on the GOB, which
needs to make clear how it intends to deal with this crisis.
If it does nothing, or waits too long to sort out the mess,
it could find itself faced with increasing political as well
as economic problems.
McMullen