US embassy cable - 03RANGOON299

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000299 
 
SIPDIS 
 
STATE FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
USPACOM FOR FPA 
 
E.O. 12958: DECL: 03/04/2013 
TAGS: EFIN, PREL, ECON, BM, Economy 
SUBJECT: BURMA'S BANKS: GOVERNMENT CUTS LIFELINE 
 
REF: RANGOON 271 AND PREVIOUS 
 
Classified By: DCM Ron McMullen For Reasons 1.5 (B,D) 
 
1. (C) Summary: The regime has pulled the rug out from under 
the private banks, denying them any Central Bank credit. 
Though some reconfiguration of the banking system seems 
inevitable, the GOB has been mum so far on its exact 
intentions.  The longer the delay in action, the longer the 
country's economic paralysis will extend, and the bigger the 
mess the regime will inherit in the mid- to long- term.  End 
summary. 
 
GOB's Sleight of Hand 
 
2. (C) Accounts early last week of Central Bank loans to 
troubled private banks turned out to be totally false.  We 
reported that the Central Bank had extended loans of up to 53 
billion kyat (about $50 million) to the six most desperate 
banks in exchange for collateral (including the personal 
residences of their Chairmen).  In reality, the Finance 
Ministry had been leading the banks on with promises of loans 
if the collateral was right.  After a week of berating bank 
owners for incompetence and demanding in-depth assessments 
the banks' various real properties, the Finance Ministry told 
assembled bankers on March 3rd that there would be no loans 
or other new money for anybody. 
 
The Run Continues 
 
3. (C) The banks are on their own.  Without GOB help, the 
short-term survival of the largest, and hardest hit, private 
banks (AWB and Yoma Bank) will depend on their ability to 
call in outstanding loans, bring in new (or return) deposits, 
and cash in on existing assets.  So far these efforts have 
largely failed.  According to economic sources, most 
borrowers, facing a cash crunch of their own, have refused to 
repay their loans, and some have even stopped making their 
regular interest payments.  Potential investors, even if they 
have the cash, are reluctant to buy up AWB's and Yoma's 
distressed assets for fear of coming under investigation for 
ties to "criminal elements" in the banking sector. 
 
4. (C) With things as they are now, the situation could 
rapidly go critical.  Despite increasingly smaller weekly 
withdrawal caps (now set at 100,000 kyat ($100) per week), 
roughly 230 billion kyat has fled the banks during the last 
two weeks.  Due to the tightening restrictions, total 
withdrawals for this week will slow to at most 18 billion 
kyat (down from 30 billion last week).  As the slow bleed 
continues, however, there is growing risk that some of the 
banks will start to run out of cash within the next week or 
so.  These failures could be delayed for several weeks, 
though, even without GOB help, if banks are more successful 
than they have been in cobbling together some new cash. 
 
Playing God with the Banks 
 
5. (C) The decision by the GOB, made at the highest levels, 
to withhold Central Bank credit lines clarifies earlier 
suspicions that the SPDC rulers have no love for the private 
banking system, and would like to see some or all of the 
existing private banks dead.  To this end, the GOB will 
apparently conduct thorough reviews of each banks' loan 
portfolio and operations.  Though the Central Bank's twenty 
audit teams have yet to swing into action, the SPDC has 
allegedly assigned a mid-level military officer as a Cadre 
for each of the teams.  This inclusion of military officers 
is a sign that the final analyses of the banks may be based 
as much on political agendas than financial facts. 
 
6. (C) Assuming the regime has decided to review the banks' 
operations, the timing of this next move is uncertain.  One 
economist guessed that the regime would wait until the first 
major bank runs out of cash before sending in the 
military-led audit teams.  In any event, the financial 
investigations will likely wait until Military Intelligence 
completes its own inquiries into allegations of embezzlement 
and illegal foreign exchange trading that hang over the heads 
of some top bankers. 
7. (C) It is equally hard to predict who the GOB will allow 
to remain standing when the dust clears.  If the auditors do 
their job properly, a bank's survival will depend primarily 
on the quality of its loan portfolio (now a big question 
mark) and the cleanliness of its daily operations.  However, 
the X-factor is the weight the GOB will give to politics and 
cronyism.  For example, while AWB (as the epicenter of the 
banking crisis) is a logical choice for destruction or 
dismantling, the bank has outstanding several large loans 
given to major construction firms for projects in which the 
GOB is involved.  KBZ Bank is a logical survivor, as the 
Chairman is close friends with Vice Senior General Maung Aye. 
 However, KBZ's lending practices are reportedly among the 
least sound of any of the privates. 
 
8. (C) One theme that we've been hearing around town is 
merger.  Many are predicting that the regime will force the 
merger of many of the smaller private banks so that there is 
more competition and a better spread of deposits (before the 
crisis, AWB and Yoma together held about 65-70 percent of 
total deposits).  However, we have no solid evidence that the 
GOB is actually planning to do this, or, if so, when and how 
they plan to do it. 
 
The Future is Hazy 
 
9. (C) The GOB's decision not to make clear its intentions 
has left the banking and business community in a bitter mood. 
 No one debates the wisdom of doing an honest and thorough 
review of the banks and subsequently disposing appropriately 
of bad banks, bad loans, and bad bankers.  If done quickly 
and properly, this could be a good thing for the economy. 
However, the longer the government waits to take charge, the 
more expensive any final solution will be.  In addition, the 
longer the economic paralysis stemming from the banking 
crisis continues, the greater the damage to the already weak 
economy, and the increasing chance for some degree of social 
unrest. 
Martinez