[Congressional Record Volume 144, Number 77 (Monday, June 15, 1998)]
[Senate]
[Pages S6313-S6314]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         ASIAN FINANCIAL CRISIS

  Mr. MURKOWSKI. Mr. President, last Thursday, before Secretary of 
Treasury Robert Rubin began testifying before the Senate Finance 
Committee, it is interesting to reflect on the status of the Japanese 
yen. At that time, it was trading at 141 to the dollar. During the 
hearing, I had an opportunity to ask Secretary Rubin whether or not the 
United States would intervene to stabilize the yen, and Secretary Rubin 
correctly observed that with the hundreds of billions, if not trillions 
of dollars and yen trading around the world on a daily basis, central 
bank intervention can only stabilize a currency for a very short period 
of time. It is further interesting to note, upon the completion of the 
Secretary's comments the yen fell to 144 to the dollar. So clearly 
there is a question of confidence.
  On Friday, the Government of Japan announced that the Japanese 
economy had met the standard definition of a recession; that is, two-
quarters of negative growth. Unemployment in Japan is at its post-1950s 
record of 4.1 percent, which in Japan is extraordinarily high, with 
youth unemployment exceeding 9 percent.
  As of this morning, the yen has fallen through the 146 level. The 
Japanese stock market was within 2 percent of a 52-week low. Moreover, 
the stock markets--Hong Kong, India, Malaysia, South Korea and 
Thailand--have all hit 52-week lows. Mr. President, it is clear that 
Asia has yet to turn itself around from the crisis that started well 
over a year ago, and the biggest reason Asia is tumbling is because the 
Japanese Government has failed to face up to the realities of its 
crumbling economy, especially the dismal state of its banking sector. 
So long as Japan fails to take decisive action in the banking sector, 
the yen is very likely to plunge further as lack of confidence 
prevails, carrying with it the threat to all Asian economies of 
deflation and further currency devaluations. I think you would agree 
that all Americans should be very concerned about this crisis in Asia, 
and particularly in Japan.
  Japan is the second largest economy in the world and imports more 
than $66 billion in goods from the United States. Moreover, Japan is a 
major importer from the rest of Asia, and if its economy continues in 
recession, the rest of Asia will remain mired in economic decline which 
could lead to political instability, not unlike what we recently 
witnessed in Indonesia.
  The reality of the yen decreasing in value is very simple, Mr. 
President. Eighteen months ago, the yen was about 80. A year ago, it 
was a little over 100. At that time, it took 80 yen to buy a U.S. lamp. 
Today, it takes 146 yen. As a consequence, we are not selling any lamps 
or much of anything else in Japan.
  Alan Greenspan recently noted:

       Without first fixing its banking sector, Japan has little 
     hope of fueling economic recovery.

  An editorial in today's New York Times, commenting on Japan's 
recession, states:

       The first priority for Japanese officials must be to save 
     the country's sick banking system.

  Ever since the so-called bubble economy burst in Japan 7 years ago, 
the banking system has been carrying bad loans on its books from the 
days of heady land and financial speculation.
  As a former banker with 25 years of experience in commercial banking, 
I can tell you what happens when these loans become nonperforming. When 
the payments cannot be made, of course, the interest can't be paid as 
well. More often than not, the bank simply adds the past-due interest 
to the principal and brings the loan current, and the loan appears 
current on the books when, in reality, it is a nonperforming loan and, 
in many cases, a loss.
  Since 1991, the Japanese Government has promised time and time again 
to reform financial sectors within the country, but it has yet to 
fulfill its promise. Instead, I believe that the Government has always 
believed it could say one thing and do another or, in this case, simply 
rely on exports to stimulate the economy. The reality is that it will 
not and has not worked in the past.
  In January, Japan's Ministry of Finance announced that the number of 
problem loans was $577 billion, of which at least $85 billion had 
already gone bad or were insolvent. The remaining, nearly $500 billion, 
had the potential to go bad as well. Some analysts believe the value of 
the problem loans today in Japan is closer to $700 billion.
  Following this report, the Japanese Government announced a large bank 
bailout, but since then almost nothing has been done to implement it. 
The sick banks stay open and the economy continues to hemorrhage.
  In Japan today, short-term interest rates are at their lowest level 
ever since economic statistics have been recorded. Short-term loans 
carry interest rates--interest rates, Mr. President--below 1 percent. 
Imagine that the yield on a long-term, 10-year Japanese Government bond 
is an incredible 1.3 percent. With interest this low, it is hard to 
imagine why Japan is sinking into a recession.
  Yet, in a recent poll, 95 percent of Japanese companies interviewed 
complained about the difficulty of receiving loans from Japanese banks. 
The explanation is simple: The banks are fearful of making new loans. 
There is a credit crunch in Japan because of the overhang of all the 
bad debt that is being carried on the banks' books already. So long as 
this overhang continues, Japan will continue to fall further into 
recession.
  Mr. President, the Japanese can learn a valuable lesson from our bad 
experience with the failed savings and loans in the United States. When 
the S&L crisis first began to be felt in 1985, it was debated at great 
length here on this floor. Congress and the President refused to face 
the crisis and did not provide the sufficient funds to close the failed 
S&Ls. This only prolonged the crisis and ballooned the cost of the 
bailout to the taxpayer.
  When we first recognized the difficulty with the failing savings and 
loans, the estimated loss at that time was $25 billion to $30 billion. 
But we in the United States did not take our medicine in a timely 
manner and the S&L bailout ultimately cost the taxpayers of this 
country more than $200 billion.

  We finally did face the S&L problem. The longer we put it off, the 
more it cost. We created the Resolution Trust Corporation. We closed 
down the failed banks and consolidated others. After several years, we 
finally put the S&L crisis behind us, because we recognized that 
keeping sick financial institutions open only exacerbates the problem 
and costs more to the taxpayer.
  By contrast, the Japanese banks and their regulators have for years 
tried to hide their financial problems. In order to help cover up the 
insolvency problems of Japanese banks, just before the end of the 
fiscal year, in March, the Ministry of Finance changed the accounting 
rules affecting the so-called BIS ratio, a ratio used by international 
markets as a bellwether of financial health of the banks. This ratio 
says that shareholder equity--or assets minus liabilities--should at 
least equal 8 percent of the weighted assets, or typically the 
outstanding loans.
  The changes allowed the banks to use the purchase price of their 
stock portfolios as the asset value when the stocks' prices have 
fallen. Since many of these stocks were bought in the heyday of the 
Japanese bubble economy, this enabled the Japanese banks to look 
healthy when, in fact, they were sick. Indeed, they are very sick, Mr. 
President.
  Moreover, the Government attempted to manipulate the end-of-March 
stock prices by buying up shares on the open market. Neither of these 
actions suggest that the Japanese Government is serious about making 
banking changes in conformity with good accounting practices.
  Until Japan faces up to its banking crisis, things are going to get 
worse, not only in Japan but throughout Asia, because of the importance 
of the Japanese economy to the rest of Asia.
  Another looming threat to Asia lies in China which also faces a 
seriously dangerous banking situation. I was over in Beijing and 
Shanghai towards

[[Page S6314]]

the end of the year. It is amazing to see the number of huge high-rises 
with very little occupancy as they attempt to negotiate the rent to a 
level to get people in them, regardless of if it makes financial sense.
  By some estimates, China has as much as $250 billion in doubtful 
loans. The Government-controlled Chinese banking system has been 
directing funds to favored companies regardless of the economics. In 
China's case, 70 percent of the state-owned banking loans go to 
inefficient and near-bankrupt state-owned enterprises. The Government 
is attempting to encourage foreign ownership coming into China, but 
there is a great reluctance on the part of U.S. firms to come in and 
share the debt associated with those opportunities.
  In any event, Mr. President, as a result, an estimated three out of 
four state commercial banks are now believed to be insolvent in China. 
China has announced their intention to reform their banking system, but 
with the Asian economy weakening and Japan in recession, China may wait 
too long to make the tough changes, and then those changes become that 
much tougher.
  In the end, we could find the two largest economies in Asia in 
recession, and I think this is very likely. My experience in finance 
tells me that when you have bad financial news, if you can take the hit 
up front and get on with it, as opposed to bearing it and putting it 
off, you will be much better off. That is not what is happening in Asia 
in either the case of China or Japan. There is a great reluctance to 
face up to the realities and take the medicine to change the banking 
system and get them back on a functional basis. This would shore up the 
economy in Asia.

  Finally, Mr. President, our own U.S. economy is, more than ever, 
linked to the world economy. So I can only hope that the Japanese 
Government and the Chinese Government will accept the problems in their 
system and make the necessary changes before the cost becomes too 
great, before the cost affects the U.S. economy and the U.S. taxpayer.
  Mr. President, neither Japan nor China is going to survive this 
crisis merely by devaluing their currency and trying to export their 
way out of their economic problems. When we see both countries taking 
serious steps to address their failed financial institutions, as they 
are currently structured, and bringing greater transparency to their 
banking systems, then at last we will know that Asia is beginning to 
turn the corner.
  Mr. President, I suggest they start now without further delay.
  I thank the Chair and suggest the absence of a quorum.
  The PRESIDING OFFICER. The clerk will call the roll.
  The legislative clerk proceeded to call the roll.
  Mr. MURKOWSKI. Mr. President, I ask unanimous consent that the order 
for the quorum call be rescinded.
  The PRESIDING OFFICER. Without objection, it is so ordered.

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