Mon, Oct 18, 1999 page18

• Bank pact a good deal for all concerned

  • Anthony Lawrance - 安東尼
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  Ahem. Perhaps I spoke too soon in last week's column about the golden opportunities likely to go begging in the aftermath of the 921 earthquake. There has been some blink-and-you'll-miss-it action over the past week to resolve a complex issue at the heart of reconstruction efforts, for which the government deserves some praise.

  I'll admit it: I'm impressed. What had seemed like an interminable dispute over who should bear the burden of outstanding mortgage loans in the worst-affected areas of central Taiwan has been quickly settled. Although the shouting is not yet over, it seems almost certain that a compromise has been worked out among the banking sector, homeowners and the government.

  It works like this. The banks will swallow bad loans for about a third of the properties that were destroyed in the quake, thereby clearing genuine home-owners of an impossibly heavy financial commitment. Those homeowners are obliged, however, to take out new mortgages for reconstructing their houses with the same banks. These new loans will be held at low interest rates, which are being subsidized by the Central Bank of China. The value of the land on which those destroyed houses sit, meanwhile, will not be entirely lost, as the Cabinet has offered homeowners a straight swap for state-owned land.

  

  The deal obviously does not provide the best of all worlds to people who have lost everything in the quake. But, hey, that's what happens if you don't take out earthquake insurance in a quake-prone area like Taiwan. The government can't afford to introduce a kind of moral hazard by letting people believe they will always be bailed out when natural disaster strikes.

  So it's a win-win-win situation (don't you hate that phrase, abused all too often by foreign minister Jason Hu?) for the banks, the homeowners and the government. The banks don't have to bother with bankruptcy procedures, homeowners don't have to fret about passing on double mortgages to the next generation, and the government doesn't have to worry about setting a bad precedent for future policy-making.

  But hang on, somebody has to lose somewhere, don't they? What about the other two-thirds of outstanding mortgages?

  Ah, now that's the interesting part. That other two-thirds is comprised of "commercial" property owners -- people who were renting out their properties. Businessmen. Landlords. People who already had a roof over their head, but who chose to take out a second mortgage. Now, not only will they be losing their rental income, they face the prospect of paying back those mortgages out of income from other revenue streams.

  Okay, so it would be unfair to lump everyone together in the same category. Not every landlord is a bloodsucker. But you have to admit that if anyone is going to take a hit, it should be the landed pseudo-gentry. Why? Well, a) they can better afford it; and b) in central Taiwan, their ranks are rife with corruption and organized crime.

  Indeed, the real beauty of the mortgage-loan deal is that it kills two birds with one stone, if you'll pardon the expression. Besides clearing excess supply from the property market in one of the most over-supplied areas of Taiwan, it will also shake out more than a few speculators.

  Granted, Taiwan's property market woes of recent years have not been entirely the fault of speculators. Their greed was fueled by readily available -- some would say recklessly so -- capital from the rapidly expanding banking sector. If all were to be fair, critics may say, the banks should accept their share of responsibility for the situation, having given out all those mortgages in the first place. The critics have a point, as the quake may well have conveniently buried a problem that the banks would have had to face sooner or later anyway: rapidly diminishing worth on the collateral put up on mortgages that were too easily given out.

  Then again, if anyone could put themselves in the government's shoes, it's a no-contest between burning small-time speculators and locking horns with a politically powerful banking group.

  And when you look at how much else the government has on its plate, it's hardly surprising that the Cabinet was in a hurry to get this issue out of the way.

  Who knows, the success may even be short-lived. Sorting out the ground rules of reconstruction and forcing people to play by them are two different matters. So perhaps we should take the efforts of the never-say-die progressives at the Council for Economic Planning and Development as a case study over the next few months.

  Apparently the council's chairman, Chiang Ping-kun, has his heart set on a grandiose plan for urban renewal. As far as he and his band of PhD-toting officials are concerned, old townships that grew up helter-skelter over three decades of breakneck economic growth will no longer do for Taiwan's burgeoning middle-class. These old communities weren't just aesthetically challenged; many, if not all, were poorly planned and shoddily constructed. The council wants to make sure the same mistakes are not repeated in their reconstruction.

  Unfortunately, such ideals runs counter to the more practical objective of the Ministry of Finance and its cronies in the banking sector, which is to get the homeowners economically active again as quickly as possible. Once people have money in their pockets it's hard to tell them how they should spend it -- and even harder to convince them that they should hold on to it until the necessary urban planning has been completed.

  My money's on the financiers over the planners. Why? Look around you: despite the CEPD's best efforts, planning and development have become mutually exclusive terms in Taiwan, and this isn't likely to change in our lifetimes.

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  Heard on the street: Taiwan Fertilizer's main crime? Its senior management was too close to a certain political maverick -- just like most of the other "landmine" stocks that were left dangling by a certain party when the after-effects of the Asian crisis hit Taiwan last year.
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