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Southeast Asian Debt Restructuring Institutions: The Lessons


Code : ITF0012

Year :

Industry : General Business

Region : :Asia

Teaching Note:Not Available

Structured Assignment : Not Available

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Introduction: The Asian Crisis of 1997 (Exhibit 1) had a severe effect on the financial condition of South Asian countries. The scale of financial distress in the South-East Asian economies was large by any standard. At the peak of crisis, non-performing loans (NPLs) as a percentage of loan portfolio was estimated to range fromabout 19%(in Republic of Korea) to 64%(in Indonesia).1 The sharp currency depreciation and decline in asset values combined with a very strong downturn in economic activity in 1998, led to a deterioration in bank asset quality.The restructuring strategies adopted by the four affected countries, Indonesia,Malaysia,Thailand andRepublic ofKorea have beenmuch similar.Various strategieswere implemented which involved setting up of restructuring agencies, injection of liquidity by the respective central banks, closure or takeover of insolvent financial institutions and capital injection fromprivate and public sources.However, the activities of the restructuring agencies were under tight scrutiny as the public costs involved in the four countries ranged from 12% to 45% of GDP (Exhibit 2). Therewas widespread criticismover the functioning of these agencies including the slow-pace of activities. “We need tomovemuch fasterto bring back growth,”saidHarjitBhatia,Asia-Pacific president ofGE’sGlobalFinancialRestructuring unit.2 There were various reasons expressed by the analysts for the slow-pace functioning of restructuring institutions including high political intervention and poor bankruptcy laws. By mid-2004, majority of the agencies were either closed or there was a proposal to shutdown. In February 2004, Indonesian Bank Restructuring Agency (IBRA) closed down its operations. The Bank of Thailand was considering the proposal to close down its restructuring wing in 2005 and Danaharta, the National Asset Management Company of Indonesia sometime in late 2005. However, industry experts expressed concerns over the pre-mature departure of the agencies. “There has been a clean-up but not asmuch as themarket would like,” said Kevin Colglazier, Head of Global Fixed Interest at First State Investments in London.

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