Vietnam VAMC - The Tip of Which Iceberg?
On July 9th 2013, the new Vietnamese state-owned asset management company (VAMC) officialy opened. In this issue of Distressed Devt Insider, we consider how much can VAMC practically be expected to achieve? How effective will it be in cleaning up the Vietnamese banking and real estate bubbles, and thereby drive a sustainable market and economic recovery for the country? How does it compare with other government sponsored asset management and debt monetization entities?
Thailand FRA 1998
The Thai Financial Sector Restructuring Authority (FRA) was established to auction the loans of 56 failed financial institutions. The NPLs were sold to foreign buyers because there was no domestic liquidity, similar to what we see in Vietnam now. Holding an auction ensured that market price was achieved with loans selling between 15 and 30 cents on the dollar as a percentage of loan principal. The losses were underwritten by tge IMF, and the economy started rebounding within 4 years of the 1997 Asian Crisis, two years ahead of the global mean for crash recovery. The Thai FRA was successful for five primary reasons:
Prompt action – to solve the NPL problem was sweeping and decisive
Pricing reality prevailed – loans were clearly sold at market price (through public auction)
Financing the losses – in this case, funding was provided by the IMF
New capital – essential for liquidity and kick-start new credit was provided by foreign investors
NPL infrastructure – legal, regulatory and financial infrastructure was created for effective NPL monetization
South Korea KAMCO 1998
Korea Asset Management Corporation (KAMCO)’s response to the 1997 Asian Crisis has subsequently been hailed as an international blueprint for successful NPL monetization. As well as adopting the five principles listed above, KAMCO not only achieved market price for NPLs through public auction, but also retained additional upside for the state by selling into equity joint venture partnerships with successful bidders. Again, supported by the IMF, NPLs sold in a range of 12 to 43 cents on the dollar. KAMCO also did not limit NPL sales to failed banks, but used the exercise to close institutions with poor capital inadequacy. KAMCO was subsequently able to finance losses through the issue of asset backed securities, which further opened up the domestic market to international investors and lifted the credit status of the country as a whole.
Turkey TMSF 2001
The lesson to come out of the Turkish currency crisis was the critical need for new capital, both to finance bank NPL losses and to help boost market recovery. After a market crash, a local capital famine is normal, so the introduction of foreign capital becomes unavoidable. Turkey’s Saving Deposit Insurance Fund (TMSF) originally tried to monetize the bad assets of 20 failed banks themselves, but this produced disappointing results. In 2004, the government auctioned NPLs to international investors, adopting a KAMCO style model. NPLs were initially sold at 18 cents on the dollar, which later rose to over 32 cents on the dollar from JV partnerships with successful bidders. Within two years of this endeavour, the markets had recovered and the economy had rebounded.
Ireland NAMA 2010
The Irish National Asset Management Agency (NAMA) discovered how virtually impossible it is to price NPLs accurately after a crash without going through an auction process. Funded by the EU, NAMA valued and purchased assets at 56 cents on the dollar when they should have paid a maximum of 40 cents. Prime assets were immediately monetized above purchase price, but for secondary assets, pricing reality hit. Having already borrowed from the EU, with no money in state treasury, additional deficits incurred by selling assets at a loss could not be funded. As a result, the property market could not recover and the domestic economy is locked in recession for the foreseeable future. Government AMCs have to act quickly to monetize loans because NPLs lose value with time. The loans that NAMA should have paid 40 cents on the dollar for in 2010 are now worth 25 cents, further adding to the final cost, and turning the exercise into a public relations and economic debacle.
Spain SAREB 2012
Spain’s “bad bank” SAREB resembles a car undergoing a new paint job, just before it launches off the top of a cliff. The fact that it took Spain two years into the Global Financial Crisis to acknowledge that there was a problem, and an additional three years to act, speaks volumes for the countries’ disaster mismanagement. Assets have been transferred into SAREB at an average 45 cents on the dollar, which is twice the level that many experts consider realistic. The main driver for the Spanish government in creating SAREB seems to be manipulating EU bailouts, rather than cleaning up the banking sector and driving economic recovery.
Vietnam VAMC 2013
The VAMC has been set up to purchase bad loans from banks at book value. In exchange for the loans, VAMC gives banks zero coupon VAMC bonds, which the banks can use as collateral to borrow from the State Bank of Vietnam. The VAMC bonds are valid for five years during which time the selling bank is required to make provisions for the bonds at 20% per annum. After five years, the bond/loan is written down to zero. VAMC is mandated to monetize the loans it buys, but as a state owned enterprise it is not permitted to sell below book value. In practice it may therefore be able do little else but hold the loan until such time as the originating bank takes it back from them again.
The launch of VAMC gives official recognition to the NPL problem in Vietnam and the need to do something about it. However, VAMC is not an AMC in the sense of actively managing bad assets. In essence, it is a mechanism for banks to receive a 5-year interest free loan from the government to assist liquidity management, cosmetically labelled as an AMC. VAMC distinguishes the tip of the bad debt iceberg but does very little about solving the increasingly costly, submerged, banking sector problem.
VAMC appears to mirror western strategies, where markets are nowhere near recovery five years after the 2008 crisis, and where stronger government balance sheets allow them to print money in perpetuity. In order for VAMC to be effective, both the property market and bank credit market will need to recover during the 5 year bond holding period, so the banks can recoup their loan principal or bank earnings rebound sufficiently to afford the loan write-offs. This looks extremely unlikely in Vietnam, in the current, deteriorating, regional and global climate.
Until a comprehensive solution to the banking and real estate bubbles is implemented, the property market will continue to slide. Bank balance sheets will continue to erode, bank liquidity will become more constrained and earnings decline. The launch of VAMC, at best, gives the banks additional breathing space. History shows that banking crises do not go away on their own, without hard-hitting central action. The other Vietnamese government initiative of increasing foreign equity stakes in banks, subsidizes the NPL problem, it does not solve it.
The financial tsunami that the banks and authorities are missing is that bad debt is inherently unstable. NPLs, whether secured or not, are perishable and lose value with time. The clock is ticking. The longer it takes to solve the NPL problem, the more it will destroy bank balance sheets, cost the government, and delay economic recovery.
On the flip side, there is an enormous amount of technical NPL expertise and global experience at the disposal of the Vietnamese authorities in Asia. There are also vast pools of international capital ready to finance NPL losses and boost economic recovery once Vietnam has decided that it wants to really get to grips with its NPL problems.
Looking at the broader picture within Southeast Asia, it is the first time since the 1997 Asian Crisis that we have witnessed the advent of a new government owned bad loan management entity. Inter-jurisdictional contagion, a new phenomenon that appeared during the 2008 Global Financial Crisis has yet to be experienced in this part of the world. Whether the Vietnamese VAMC is required in isolation, or whether it is the tip of a new regional NPL iceberg, remains to be seen.
