BURMA'S BANKS: GOB TAKES ACTION, BUT IS IT ENOUGH?

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000225

SIPDIS

STATE FOR EAP/BCLTV, EB
COMMERCE FOR ITA JEAN KELLY
TREASURY FOR OASIA JEFF NEIL
USPACOM FOR FPA

E.O. 12958: DECL: 02/20/2013
TAGS: EFIN PREL ECON BM
SUBJECT: BURMA'S BANKS: GOB TAKES ACTION, BUT IS IT ENOUGH?

REF: A. RANGOON 214

B. RANGOON 213

Classified By: CDA a.i. Ron McMullen for Reasons 1.5 (B,D)


1. (C) Summary: The GOB has agreed to extend loans beginning
next week to the country's beleaguered private banking
sector. However, the regime blames the banks for their
predicament, and has apparently decided to let the crisis run
its course without trying any extraordinary new steps to
reassure depositors. Hectic efforts by bankers to lure back
customers, combined with some short term measures allowing
banks access to their reserves at the Central Bank, are
keeping the peace for now. Next week will be a test for this
approach, however, as almost all companies in the country
have to meet payroll obligations on February 28. If
employees are not paid that day, there could be trouble. End
summary.

Turning the Corner?


2. (C) There was some optimism on February 20 that the
banking crisis here had "turned the corner." This sentiment,
apparently stemming from an analysis sent to Senior General
Than Shwe, is based on an agreement between the government
and stricken private banks for the Central Bank to advance an
undisclosed amount of money to the banks within a week. This
new money, hot of the presses, will be collateralized by the
real assets now being used as collateral for the banks'
outstanding loans. Reportedly the Finance Ministry has also
demanded that each of the private banks' chairmen put up
their own residence as part of the collateral.


3. (C) In the meantime, the GOB has allowed banks to draw
from their reserves on deposit at the Central Bank. Thus far
AWB has drawn "several billion" kyat by converting many of
the GOB bonds it held in the Central Bank. Yoma Bank has
taken about 5 billion kyat (roughly $5 million at current
rates). Other banks have drawn or will reportedly draw an
estimated 1 to 2 billion kyat per institution. These draw
downs will not come close to matching the outflow thus far,
however, which is estimated at more than 200 billion kyat
($200 million; with AWB and Yoma Banks losing 120 billion and
60 billion kyat respectively). That total is equivalent to
about 40 percent of the banks' total deposits (now reported
as about 550 billion kyat) and virtually all of their cash on
hand at the start of the crisis.


4. (C) The hardest hit banks now are still relying on
emergency measures to keep themselves afloat until the
Central Bank advances are organized and paid out. According
to the Yoma Bank chairman, these measures include stopping
all new lending, including credit card operators; calling in
whatever loans it can; offering "guaranteed" accounts; and an
advertising campaign urging customers to return deposits of
any amount. In addition, the banks are continuing to ration
out weekly withdrawals. Currently Yoma Bank and others are
handing out chits to customers supposedly entitling them to a
withdrawal (currently 100,000 kyat) several days in the
future.

GOB: "Let Them Stew in Their Own Wine"


5. (C) For now we do not expect the GOB to take any more
aggressive or strategic action to aid the banks in returning
confidence -- and deposits. Economic journalists and bankers
with whom we spoke have all agreed that the top
decisionmakers here (read: Vice Senior General Maung Aye and
Senior General Than Shwe) still view the banks' problems as
their just reward for flouting the law with shady deals.
"Let them stew in their own wine," is one reported comment by
Maung Aye. The SPDC leadership has long been reported to
dislike the private banking sector (or at least some members
of it) because it is "politically uncontrollable."
Unfortunately, the consequences of the regime's actions, if
they prove inadequate, will be felt by all twenty private
banks, even though the junta's ire (and current crisis) was
apparently provoked by the actions of only a few bankers.

All Quiet...For Now


6. (C) The combination of measures the banks have put in
place seems to be working for now. Crowds have dispersed
from in front of bank branches, and there have been no
further reports of stone throwing or other civil disorder.
Presumably individual depositors will remain calm as long as
there is some credible promise of payment and some hope to
recover their funds. If the banks get the transfusion they
need from the Central Bank, matters may sort themselves out.
Some business people, in fact, are confident that the lines
of credit will restore enough liquidity to get commerce,
largely frozen since February 18, moving again.


7. (C) Because those with kyat are holding tight in case of
further emergency, asset prices have been dropping rapidly.
The price of gold has dropped 35 percent since February 14
and the dollar has fallen to 950 kyat/dollar (after dipping
to 800 kyat/dollar briefly on February 19). This trend
should reverse in the short term if confidence is restored.
However, we may not see a return to the same rates of general
inflation and kyat depreciation that prevailed before the
crisis. One healthy result of the this crisis has been to
purge the economy of the uncontrolled credit creation system
run by the informal financial system. With hindsight, it now
appears that their operations might have accounted for as
much as half of the credit creation and half the inflation
that plagued Burma over the past three years. Provided the
Central Bank retires its advances to the banking system as
customers return their deposits, not at all a sure thing,
overall inflation in Burma could settle to levels much lower
than we have witnessed over the past several years.

How Long Can the Peace Hold?


8. (C) The coming week will test the current government
strategy. In particular there are two dates looming that
might exacerbate the situation. First, Senior General Than
Shwe is scheduled to leave for Malaysia this weekend. As he
is the sole arbiter of policy, should a downturn occur early
next week the GOB will likely be paralyzed. Second, pay day
across the country for many wage earners is February 28. If
a significant number of employers are unable to meet payroll,
there could be some serious consequences.
McMullen