January 1998 IMF Bail Outs: Truth and Fiction
IMF assistance to Korea, Indonesia, and Thailand has been criticized for
"bailing out" specific groups--such as commercial banks and private investors--at
the expense of other, less favored groups and taxpayers. In fact, IMF
assistance has been provided in support of programs that are designed to
deal with the causes and consequences of economy-wide, structural imbalances and
the potential threats these imbalances pose to the international monetary system.
Under the conditions of these programs, commercial banks and private investors
are not being protected from financial losses, as outlined below.
Equity holders and owners of other publicly traded instruments have
suffered losses. In U.S. dollar terms, as of December 17, 1997:
Korea's stock market had declined 67 percent since August 11;
Indonesia's stock market had declined 75 percent since July 30; and
Thailand's stock market had declined 63 percent since July 29.
There are no provisions in IMF-supported programs for public sector
guarantees, subsidies or support for nonfinancial institutions that
are facing financial difficulties and may be forced into bankruptcy. When
financial sectors are restructured, shareholders and, as far as possible,
also creditors of insolvent institutions should bear the losses they
would have sustained in the context of liquidations under bankruptcy
procedures. Under the programs:
no liquidity support is to be given to insolvent institutions;
no special treatment is provided for shareholders of institutions that
have lost their capital--any payments they receive will be in strict
conformity with applicable laws; and
in cases where national authorities had granted guarantees to certain
categories of depositors or creditors prior to entering into policy
negotiations with the IMF, the authorities must ensure that any likely
recourse to official support can be met while still achieving a
sustainable fiscal position in the medium term.
Liquidity support may be provided to financial institutions that are
undercapitalized but solvent. However, under the programs:
such support is conditional upon the institutions being recapitalized
and undertaking incisive restructuring programs to restore them to full
financial health;
whenever public resources are used to support the restructuring of
institutions whose operations have been suspended or placed under
conservatorship, previous owners should be removed (through writing
down their equity) and management replaced; and
the potential cost of liquidity support to the public purse should be
minimized through measures that (a) improve the institutions' financial
health (and thereby their capacity to repay liquidity support) and
(b) strengthen the economy so that creditors have much less reason to
wish to unwind their exposures.
Steps That Have Been Taken
KOREA
The operations of 14 of 30 merchant banks have been suspended (the
operations of 9 were suspended at the start of the program). Those that
fail to be recapitalized within set time scales, and fail to satisfy the
authorities as to their future viability, will be closed.
All other merchant banks are required to submit rehabilitation plans
which are to specify measures to strengthen capitalization, liquidity,
management and operation. If the plans are unacceptable or fail to be
implemented, the institutions will be closed.
Two commercial banks in distress will also be required to recapitalize
and restructure, e.g., by merger with an existing domestic or foreign
institution, according to a strict timetable. Failure to satisfy the
authorities' criteria will result in closure. Meanwhile the government
has taken voting control by providing temporary capital support against
the additional condition that the banks substantially reduce their cost
base.
The government has fully guaranteed all deposit and deposit-like claims
of domestic resident creditors. The scheme will be fully funded by the
government but will be replaced by a scheme limited to small depositors
and financed by covered institutions in 2000.
The government has financed the acquisition by the Korean Asset
Management Corporation of impaired assets, from institutions submitting
rehabilitation plans, at prices reflecting their realizable value.
In cases where institutions are closed, payments will only be made to
insured creditors. Losses will be born by shareholders and
uninsured creditors.
The Bank of Korea's liquidity is provided only against collateral
in the form of government and government guaranteed securities.
KOREA |
| Total Financing Committed: $57 billion, of which: |
| $21 billion |
Fund |
| $10 billion |
World Bank |
| $4 billion |
Asian Dev. Bank |
| $22 billion (approx) |
Group of industrial countries1 |
| 1As a second line of defense, a number of countries--Australia, Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, the United Kingdom, and the United States--have informed the IMF that they are prepared to make available
supplemental financing in support of Korea's program with the IMF. |
INDONESIA
16 insolvent banks have been closed. Shareholders of the
closed banks have had their capital written down and shareholder losses will not be
compensated. The government will not guarantee repayment of the liabilities of closed
banks except for small depositors who will be compensated promptly (within two
weeks after bank closure) for up to Rp20 million per depositor per bank. Payments to
depositors will be administered by Bank Indonesia and funded by the government. Other
claims will be settled from the proceeds of asset sales. Weak, but viable, banks
have been required to formulate and implement rehabilitation plans. If an individual
bank's plan is not acceptable to the central bank, the bank will be closed and placed
under receivership. Bank Indonesia will streamline its lender of last resort function.
Loans to illiquid but solvent banks will be provided in accordance with stringent access
conditions. These loans will be collateralized and extended to individual institutions at
increasingly punitive interest rates. Any emergency assistance to banks to prevent
systemic risks will be explicitly guaranteed by the government. At a later date, the
government will introduce an explicit, limited, and self-funded, deposit insurance
scheme. Extensive action will be taken to deal with state and regional development banks.
State banks will be downsized and gradually privatized, while their operations are
streamlined and subject to international auditing; also, the authorities and the
individual banks will agree on performance contracts and their recapitalization only will
take place in conjunction with privatization. Regional development banks with potential
major losses will be placed under conservatorship, and will be rehabilitated by requiring
the shareholders (i.e., the regional government) to provide cash injections; if unable to
obtain additional capital within one year, the bank will be closed. In the case of private
nonfinancial corporations, the government will not guarantee any of their liabilities.
INDONESIA |
| Total Amount of Assistance Committed: $40 billion, of which: |
| $10 billion |
Fund |
| $4.5 billion |
World Bank |
| $3.5 billion |
Asian Dev. Bank |
| $5.0 billion |
Indonesia [contingency reserves] |
| $5.0 billion |
Japan |
| $5.0 billion |
Singapore |
| $1.0 billion |
Australia |
| $1.0 billion |
Malaysia |
| $1.0 billion |
China |
| $1.0 billion |
Hong Kong (China) |
| $3.0 billion |
USA |
THAILAND
58 finance companies--16 initially and 42 subsequently (from a total
of 91)--were suspended. 56 of these companies will be liquidated; the
remaining two companies will be allowed to reopen in adherence with
strict rehabilitation plans, subject to being recapitalized within
90 days. There will be no contribution by the Financial Institution
Development Fund (FIDF) toward recapitalization. FIDF (the lender of
last resort) lending rates to viable financial institutions have been
raised above the highest deposit rates in the system and all liquidity
support will be subject to conditionality.
Shareholders
Shareholders' equity and subordinated debt in unviable finance companies
will be written down in the first instance to cover losses.
Depositors
In the original 16 suspended finance companies, claims will
be restructured in the form of nonnegotiable instruments, with 6-60 month
maturities depending on the size of the claim, and carrying market
interest rates;
In the other suspended finance companies, the instruments will be
on similar, but negotiable, terms.
In all remaining finance companies and domestic banks, depositors'
claims will be honored promptly in cash (in baht) through the FIDF.
Creditors
In the first group of 16 suspended finance companies, claims will
be honored in accordance with liquidation procedures;
In the second group of suspended companies, claims can be
restructured in the form of negotiable instruments similar to the
arrangement for depositors (but with an interest rate of 2 percent
per year, i.e., substantially below market rates), or claims can
be renegotiated or honored in accordance with liquidation
procedures; and
In all remaining finance companies and domestic banks, creditors'
claims will be honored promptly in cash (in baht) through the FIDF.
All viable financial institutions are required to strengthen their
capital after new strict loan classification and provisioning rules have
been applied, while all unviable institutions will be subjected to
central bank intervention, their management changed, and shareholders'
equity written off. Once the financial system is on a sound footing, the
broad guarantees offered to open institutions will be replaced with a
self-financed deposit insurance scheme, with limited coverage of
deposits.
THAILAND |
| Total Financing Committed: $17.2 billion, of which: |
|
| $4.0 billion |
Fund |
| $1.5 billion |
World Bank |
| $1.2 billion |
Asian Dev. Bank |
| $4.0 billion |
Japan |
| $1.0 billion |
Australia |
| $1.0 billion |
China |
| $1.0 billion |
Hong Kong (China) |
| $1.0 billion |
Malaysia |
| $1.0 billion |
Singapore |
| $1.0 billion |
($500 million each from Indonesia and Korea) |
| $0.5 billion |
Brunei |
External Relations Department International Monetary
Fund Washington, D.C. 20431 U.S.A.
Telephone 202-623-7300 Fax 202-623-6278
|
