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Saturday, Oct. 3, 2009
Devil's in the details on debt relief
Moratorium bill riddled with gaping holes, critics say
To rescue cash-strapped small firms and households, financial services minister Shizuka Kamei is preparing to submit a bill at the extraordinary Diet session this month that will pressure financial institutions to ease loan conditions for borrowers.
The proposed debt moratorium program has sparked opposition from the banking industry, other Cabinet members and the media and sent banks' stock prices reeling.
Following are some questions and answers about the controversial program:
How would the debt moratorium work and why is Kamei such a strong advocate?
The program would allow small indebted firms and households with mortgages to stall repayment for around three years.
Kamei, the leader of Kokumin Shinto (People's New Party), says the program is needed because more small firms and stores are going bankrupt as banks reduce or cancel their loans to them. He said workers with mortgages are also struggling to make payments.
"When I compare contemporary Japan to a (person's) body, blood is no longer circulating around the body, especially the capillary vessels," Kamei said after he was appointed to the Cabinet last month. "How can small firms energetically recover from the current situation? This is the most basic need of the Japanese economy."
Debt relief was one of Kokumin Shinto's policy pledges in the August election. The party called for giving a three-year break to small firms and people having trouble paying off loans due to job loss or other reasons.
Prime Minister Yukio Hatoyama has also come out in support of the program, though he is reportedly more inclined toward the idea of shelving repayment of the principal but not interest.
"We would like to consider a bill that can delay principal repayment of small firms for a while," Hatoyama was quoted by a ruling party lawmaker as saying during a speech in Kagoshima Prefecture in July.
Would the debt moratorium program actually benefit small firms?
Yes, according to Nobuo Tomoda, senior manager at Tokyo Shoko Research, a private credit research agency.
Tomoda said that companies — especially small ones — are watching their businesses shrink and having difficulty securing funding in what some have termed the Great Recession.
"The business environment of small firms is getting considerably severe," he said.
Previous administrations took measures centered on lending to small firms, but if sales are plunging, these firms may see their debts balloon if they choose to borrow, he said.
"Because of that, there are firms that want to borrow but are unable to," he said.
Tomoda said the debt moratorium would effectively help firms hold on to their cash. He said financing will also be easier since cash will not fly out the window in the form of debt repayments at a time when revenues aren't growing.
Who doesn't want the debt moratorium program?
The banking industry, for one.
Katsunori Nagayasu, chairman of the Japanese Bankers Association and president of Bank of Tokyo-Mitsubishi UFJ, said banks have been doing all they can to fund small companies amid the financial crisis.
"Smoothly supplying funds to small firms is the core of our main businesses and we are doing what we can," Nagayasu said last month.
Although moratoriums were an idea used before the war, Nagayasu said a large-scale program would be unprecedented.
"At least in this free economy, it is also true that a uniform and long-term moratorium among major countries is unprecedented," Nagayasu said. "We hope all elements will definitely be considered and the government will come up with a specific idea on what measures should be taken in drafting the bill."
The proposal has invited some negative comments from Kamei's colleagues. Chief Cabinet Secretary Hirofumi Hirano reportedly said the ruling coalition should handle the issue with care. Finance Minister Hirohisa Fujii said he wonders if the situation is serious enough to justify a debt moratorium.
What will be the key points of debate when drafting the bill?
It hasn't been determined which companies and individuals would be eligible for the program or who would cover the losses if the borrowers go bankrupt.
Tokyo Shoko Research's Tomoda suggests the program should only cover firms that have a realistic chance of recovering or growing enough to expand, instead of those likely to go bankrupt in the immediate future. Otherwise, he warned, financial institutions will have more bad loans and the burden on taxpayers will grow because the losses will have to be covered by the government.
News reports have suggested the program may cover mortgage loans and loans to companies that can reasonably be expected to revive themselves. They also said the government would cover financial institutions for the interest they wouldn't gain during the debt moratorium and compensate losses of the principal should the borrowers go bankrupt.
Meanwhile, some critics fear the debt moratorium could damage the borrowers' sense of fiscal discipline. Tomoda said the government must consider ways to prevent them from slipping into lax habits.
Others argue the lenders' loans are protected by the Constitution in terms of property rights and that the bill will need to be revised to keep it constitutional.