Tue, Sep 17, 2002 page1

• NPL problems can be solved with a tough government

  • By Richard Dobson / STAFF REPORTER
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  Taiwan will be able to solve its financial problems quicker than most other countries in Asia -- just as long as there is speedy, resolute action and a political willingness to cooperate on the issue.

  That's the view of Karl Jackson, director of the Asian Studies Program at Johns Hopkins Uni-versity, who was speaking yesterday at a conference organized by the Taiwan Management Institute (台灣管理學會) on improving asset quality.

  Jackson said that bipartisanship and a political willingness to inflict short-term financial pain are the keys to resolving the problems plaguing Taiwan's banking sector.

  "I remain bullish on Taiwan. That is, I think Taiwan will resolve these problems more rapidly than most places around Asia; but if -- and only if -- cooperation can be maintained across party lines on this issue," Jackson said.

  "If the willingness to cooperate along party lines declines or is lost, the length and the cost of the crisis will multiply exponentially," he added.

  On the other hand, Jackson believes that unwillingness for quick and decisive action to end the problem of expanding non-performing loans (NPLs) will lead to greater pain, both politically and financially.

  "There is a devastating price to be paid for waiting," Jackson said.

  "And this cost comes out of either the profits of the bank or, more likely, out of the pockets of the taxpayers," he said.

  In a paper delivered at the seminar, Jackson pointed out that the instinctive reaction of governments is always to allocate too few public resources.

  "But prompt action and large up-front investments by the public sector, through bank recapitalizations, are far more likely to lead to lower ultimate costs as the moral hazard inherent in repeated bailouts may be avoided."

  Jackson also believes there would be benefits because action now would get credit flowing and the economy moving again.

  Indeed, it would seem Tai-wan's banking sector can hardly afford to wait.

  As of June, Taiwan's non-performing loan (NPL) ratio stood at 7.48 percent or NT$1.05 trillion in bad debt, government figures show.

  At smaller financial institutions -- mostly credit units of farmers' and fishermen's associations -- the NPL ratio could be as high as 20 percent.

  The government says it wants an NPL ratio of less than 5 percent within two years.

  It has proposed expanding its NT$140 billion rehabilitation fund to around NT$1 trillion to cope with the headache of Taiwan's non-performing loan (NPL) problem.

  The fund -- similar to a US resolution trust -- was established last year to facilitate the writing-off of bad debts at financial institutions.

  However, opposition lawmakers have generally rejected the proposal, saying it shouldn't be up to the taxpayer to shoulder the hefty financial burden.

  In contrast, Jackson appeared to side with the govern-ment's proposal, saying that resolute and speedy action by the government is exactly what is needed.

  "Quicker is better in resolving banking crises. The earlier and more decisive the action by a government the quicker the recovery and the lower the overall costs to the taxpayer," he said.

  But delays increase the political costs to the government itself.

  On this last point, Jackson spoke from his personal experience as special assistant to the former President George Bush and senior director for Asia on the US National Security Council. He attributed Bush's 1992 election loss, in part, to the Bush administration's failure to confront a savings and loan banking crisis that erupted in the US during the mid-1980s.

  "In the short run the general public will be furious about using its money to fix the banks;but responsible political leaders must have the courage to sail directly into this political storm," he said.

  "Taking the political pain early is better than condemning oneself to more than a decade of Japanese-style stagnation," he added.

  Following the S&L crisis, Bush was forced to break his promise not to raise taxes, further angering voters in the US and damaging the credibility of the Republican party.

  The DPP could face similar hurdles if banking and fiscal problems spin out of control.
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