BURMA'S BANKS: PASSING THE BUCK ON TO BORROWERS

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000348

SIPDIS

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

E.O. 12958: DECL: 03/16/2013
TAGS: EFIN PINS ECON BM
SUBJECT: BURMA'S BANKS: PASSING THE BUCK ON TO BORROWERS

REF: RANGOON 299 AND PREVIOUS

Classified By: DCM Ron McMullen for Reasons 1.5 (B,D)


1. (C) Summary: The GOB has settled on a response to the
banking crisis that will likely just expedite the disaster it
is ostensibly trying to avoid. The regime, through a
military-run committee, demanded that banks restore liquidity
by calling in loans. With the economy at a standstill, many
businesses will now have to make their March payrolls while
under increasing pressure from the banks and Military
Intelligence for prepayment of loans. End summary.

The GOB's "Market-Based" Solution


2. (C) After early hints that the regime might rescue Burma's
troubled banks with Central Bank loans, it has instead
settled on a "solution" to the private banks liquidity
problems that throws the burden on to business and other
borrowers. The first step down this path came with the
formation in early March of the "Private Bank Management
Committee," chaired by politically influential SPDC member
Quartermaster General Lieutenant General Tin Aung Myin Oo.
The regime charged this Committee, which also includes top
Finance Ministry and Central Bank officials, to work closely
with Military Intelligence (MI) to resolve the problems in
the banks.


3. (C) The Committee directed that banks rebuild their cash
position through early repayment of loans. Repayments are to
occur according to a rigid timetable, with 40 percent of
outstanding loans due by the end of April. Not all borrowers
are subject to the Committee's fiat, though. According to
one banker, while his bank had to provide a list of large
borrowers (of 50 million kyat -- about $50,000 -- and up),
AWB (the locus of the banking crisis) had to submit data on
all of its borrowers to the Committee. Those borrowers who
are reluctant or unable to pony up the called loans will
probably have to answer to MI, one banker suggested.

Business Shoulders the Burden


4. (C) Local businesspeople, meanwhile, are shaking their
heads at the GOB's decision to make them responsible for the
resolution of the banks' problems. Most companies are
already staggering under the weight of the credit crunch
(private bank loans have not been granted since the start of
the crisis) and the inability to draw fully on deposit
accounts in various private banks. The cash flow problems
afflicting many businesses will only be exacerbated by the
new obligation to repay nearly half of outstanding loans
(including even mortgage loans) in short order. Reflecting
these concerns, and the current scramble for kyat, the value
of the dollar has dropped nearly 13 percent in value against
the kyat since March 1 (bottoming out at 840 kyat/dollar on
March 14),and the spot value of gold fell an additional 2.25
percent in the week ending March 14. Depressed asset prices
will add an additional burden to businesses trying to offload
some of their property to make ends meet.


5. (C) Meanwhile, while borrowers tremble, the situation for
some banks may be stabilizing. With withdrawal limits for
each depositor steady at 100,000 kyat/week, the private banks
still face a maximum outflow of only 18 billion kyat/week.
One official at a large bank told us that his institution had
been able, between new deposits and hastened loan repayments,
to counteract withdrawals and even witness a small net
improvement in its cash position during the week ending March

14. However, this situation is tenuous at best.
Additionally, total deposits have continued to decline -- a
sure sign of fading public confidence in the banks.

Asking for Trouble


6. (C) The GOB's curious policy decision, which simply
encourages the banking crisis to infect the broader economy,
is, of course, exactly the opposite of what most Central
Banks do when faced with a bank run. Normally Central Banks
do back flips to avoid calling loans because of the negative
spillover effects such actions have. In Burma, however, that
most shunned of options has become the government's policy
choice. Presumably this is because the GOB fears the
inflationary impact of bailing out the private banks.
However, the net result of this decision is just to spread
the pain from one set of innocent bystanders (the depositors)
to another (the borrowers). In no way does this help.


7. (C) Hopefully, the government will take another look at
this approach. In any case, however, it is becoming
increasingly apparent that the entire catastrophe will have
at least two results. First, more and more of the economy
will go underground, the only place where credit is available
and trade can now transpire. Even when the banking mess is
cleaned up, most commerce may remain in the shadows, having
learned its lesson on the hazards of doing business in the
daylight. Second, the short-term future for companies, their
employees, and the economy as a whole, is imperiled. At the
end of March, already weak firms, faced with payroll and
accelerated loan payments, could easily go under or be forced
to lay off thousands of workers -- with potentially serious
social consequences. And, if they survive March, they may
have to do the whole dance again in April (and every month
thereafter). Not a pleasant prospect for anyone in business
in Burma these days.
Martinez