US embassy cable - 03RANGOON225

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, Economy 
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