US embassy cable - 03RANGOON430

C O N F I D E N T I A L SECTION 01 OF 02 RANGOON 000430 
 
SIPDIS 
 
STATE FOR EAP/BCLTV, EB 
COMMERCE FOR ITA JEAN KELLY 
TREASURY FOR OASIA JEFF NEIL 
USPACOM FOR FPA 
 
E.O. 12958: DECL: 04/06/2013 
TAGS: EFIN, ECON, PGOV, BM, Economy 
SUBJECT: WILL BURMA'S BANKS SURVIVE? SIGNS POINT TO NO 
 
REF: RANGOON 365 AND PREVIOUS 
 
Classified By: COM Carmen Martinez for Reasons 1.5 (B,D) 
 
1. (C) Summary: Another payday passed without incident on 
March 31, but that does not mean that all is well in Burma. 
The banking crisis continues grimly on, with increasing 
negative spillover into the general economy.  Though bankers, 
borrowers, and businesses are begging for mercy, government 
policies have thus far only exacerbated the pain.  The GOB's 
objective is uncertain; it may simply want to clear out some 
bad banking operations.  Alternatively, it may be aiming for 
some more general government takeover of the private banking 
sector.  End summary. 
 
All Quiet on the Industrial Front 
 
2. (C)  Another payday came and went on March 31 without 
disturbance.  Industrialists and bankers with whom we spoke 
said that for the most part workers were paid at least part 
of their salary through a patchwork of short term measures. 
Those with a steady income (such as garment exporters) had no 
problem, others continued selling off dollars or other assets 
(at depressed prices) and/or borrowing privately from 
cash-rich firms to make ends meet.  In other cases factory 
owners had to beg forbearance from workers, extending only 
25-50 percent of employee salaries.  Some bankers reportedly 
tried to open their coffers to large private corporate 
customers to help them meet their responsibilities, but were 
rejected by the GOB's banking "oversight" committee, the 
Private Bank Management Committee. 
 
3. (C) All were adamant, though, that another peaceful payday 
is no indication that the banking crisis is resolved or that 
the economy is back on track.  Private banks are still 
restricted by fiat from offering more than 100,000 kyat 
(about $110 at current rates) per week to each depositor.  As 
a result, kyats remain in short supply as businesses and 
others hoard whatever kyat they have pending a return of 
economic confidence and liquidity to the market.  Reflecting 
this, the kyat/dollar rate has settled at about 900, despite 
a brief uptick in dollar value in the week ending March 21st 
due to the government's biannual international gem auction. 
 
Bankers or Victims? 
 
4. (C) The regime's major policy thrust continues to be 
forcing borrowers to repay 40 percent of their outstanding 
loans by April 30.  In only the second GOB statement on the 
banking situation since it began, Secretary One, General Khin 
Nyunt, told the Union of Myanmar Chamber of Commerce and 
Industry on March 29, "in consideration of those who had 
deposited money in the banks, in the long-term interests of 
the banks, and to strengthen the national economy, those who 
have taken loans from the banks should try to repay the debts 
speedily."  Bankers report that they, with assistance from 
Military Intelligence, have been somewhat successful in 
getting borrowers to return money, but that not all companies 
are able to meet the requirement.  However, bankers assert, 
this approach is killing their customers.  It may help settle 
their obligations to depositors, but in the end, banks, 
businesses and individuals will all go under collectively. 
Corporate borrowers complain that the demand for loan 
repayment, the lack of new credit, and the general economic 
doldrums, have frozen their production and eroded profits. 
 
5. (C) On top of this, according to several bankers, some of 
the private banks are no longer accepting new deposits.  It 
is unclear whether this is due to a new directive from the 
Committee, or whether private banks are interpreting broadly 
a previous order to cease offering so-called "special 
deposits" (deposits whose total value the banks would 
guarantee).  Whatever the case, while loan repayments will 
keep up with demand for withdrawals for now, a cut-off of new 
deposits, combined with existing prohibitions on extending 
new credit, will slowly starve the banks to death. 
 
6. (C) Though the origin of this new policy is debatable, 
bankers and economists are predictably blaming the 
government.  They argue that the SPDC is intentionally 
softening up the largest private banks for future liquidation 
or merger with either a government bank (namely Myanmar 
Economic Bank) or one of the two military-run banks (Innwa 
Bank and Myawaddy Bank).  The rumor mill's money is on the 
relatively young and agile Innwa Bank (run by the Myanmar 
Economic Corporation (MEC)) as MEC's Chairman, Quartermaster 
General Lieutenant General Tin Aung Myint Oo, is now in 
charge of the Private Bank Management Committee.  Experts 
estimate that at current rates of repayment and withdrawals, 
private banks can last another one to six months before they 
go under. 
 
GOB's Rose-Tinted Glasses 
7. (C) Though the current economic problems are clear to 
economists, bankers, and businesspeople, the GOB sees it 
differently.  The new Minister of Finance (a general whose 
previous area of concern was ordnance production) recently 
told one highly placed source that the strengthening kyat, 
deflation of the asset bubbles, and the stabilization or 
decline of prices of many consumer goods prove that the GOB's 
response to the banking situation has been just what the 
doctor ordered.  Bankers tell us that this same "tough love" 
sentiment pervades nightly Private Bank Management Committee 
sessions. 
 
The Blame Game Continues 
 
8. (C) The government's position has always been that private 
bankers got themselves into this mess and can damn well get 
themselves back out by calling in the speculative investments 
and insider loans that seem to have characterized private 
banking in Burma.  In econspeak, one might say that the 
government is sensitive to the moral hazard that would emerge 
from too precipitous a bailout of some of the larger private 
banks.  Bankers themselves, of course, see things 
differently.  They point to the antecedent conditions under 
which they were obliged to operate, while implicitly asking 
whether there was any other way to make money in banking when 
deposit and lending rates were capped at levels 5000 basis 
points below inflation.  Both sides are of course right, just 
as both sides were originally wrong in their behavior.  Right 
now, however, sorting out who was right and who was wrong is 
not nearly as important as containing the crisis' infection 
of the rest of the economy. 
 
9. (C) The fact is, however, that the government's approach 
has thus far only worsened the liquidity crunch.  While the 
regime's actions have produced some unintended benefits in 
reducing general inflation and popping the asset price 
bubbles that had grown up in recent years, it has also placed 
most businesses under extraordinary pressures.  So far, the 
government seems to believe that only a few of the largest 
private banks will go down, when all is said and done, and 
that state and military-owned banks will be able to pick up 
the slack.  However, there are no firewalls between the 
private banks and the government-run institutions.  Moreover, 
government-owned banks will almost certainly be far less 
inclined than their private sector competitors to seek out 
non-government borrowers, depositors, and business 
opportunities.  While the economy could undoubtedly do with a 
more restrained credit-generation machine, an expansion of 
the government banking sector will most certainly chill the 
overall economic environment, push more of the economy 
underground, and set back Burma's meager economic development. 
 
10. (C) In short, the government here is playing a high-risk 
game.  It may be right.  We haven't seen the loan books of 
any of these banks, and can't really say if the GOB is 
justified in coming down on them so hard.  However, we can be 
certain that if the regime is wrong, the entire Burmese 
economy will pay a heavy price for the SPDC's mistakes. 
Martinez