US embassy cable - 03RANGOON348

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, Economy 
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