a few more clues via cohesivity before pulling the draw string.........

( Readers like to think of themselves as a tad quicker than the crowd......

somewhat like we do here at Kitco. ) ......go gold ....salud!

But I never see this aspect discussed. Perhaps it is all too elementary. Anyone?

@t1 @studio.r: Wonderful to make your acquaintainces. Our best to both you and yours.

November 16, 1998

Volume 36, Number 1,851 Issued: Saturday, 14 November 1998

Banks Feeling Squeeze As Funds

Dry Up

BY MAKOTO SATO

Staff writer

Japanese banks are facing

serious difficulties raising

money because of their low

credit ratings and the extreme

sensitivity to credit risk that has

pervaded foreign banks ahead

of year-end book closings.

Foreign banks reduced their credit lines to Japanese

banks to their lowest level in years after the near

collapse in September of Long-Term Capital

Management, a huge U.S.-based hedge fund. Many

analysts and investors say Japanese banks are walking a

tightrope in the Eurodollar money market.

Akira Kishi, president of Bank of Tokyo-Mitsubishi

and chairman of the Federation of Bankers

Associations of Japan, downplays the credit crunch.

He said that while banks were having trouble raising

funds, all banks will have raised enough funds by the

year-end, since they have been raising funds in

advance.

Still, major banks have been having a hard time raising

yen at home because the main sources - regional banks,

investment funds and foreign banks - are reducing their

lending and putting their money into government

treasury bills. They have been doing so at such a pace

that the yield on treasury bills earlier this month turned

negative for the first time ever.

The government and the Bank of Japan are treating the

credit squeeze as an emergency, although some market

participants were expecting even stronger action from

the central bank last week.

The Bank of Japan's Policy Board decided on Nov. 13

to increase liquidity in the financial system by extending

emergency loans to banks at 0.5% annual interest,

easing the rules under which the Bank of Japan will buy

commercial paper, and conducting new open-market

operations.

The central bank fears corporate borrowers will have a

hard time securing credit toward the year-end and the

fiscal year-end in March because banks are burdened

by bad loans and lower credit ratings. It expects the

emergency measures to increase liquidity by 3.5 trillion

to 5 trillion yen ( $28.7 billion to $40.9 billion ) .

Under the emergency loan program, banks during the

October-December quarter would be eligible to borrow

from the central bank up to 50% of any increase since

the end of September in their outstanding loan

balances.

The lending program could be launched as early as

mid-December and should total as high as 3 trillion yen,

according to Iwao Kuroda, an executive director of the

central bank.

The new guidelines on buying commercial paper, which

will begin on Nov. 16, will extend the maturity limit

from three months to one year, a change expected to

expand the central bank's infusions of liquidity by

roughly 2 trillion yen.

The central bank also pledged to quickly work out

details of a new market-operation plan under which it

would buy bills issued by financial institutions against

collateral composed of corporate bonds and loans on

deeds. The plan is not expected to be finalized before

year-end. Kuroda said that these actions should

indirectly help banks searching for dollar funds

overseas because they will ease the squeeze on yen

funds at home.

Many market participants were expecting more direct

action by the Bank of Japan to ease the pressure on

banks in need of dollars. Speculation had included the

possibility of the central bank offering dollars to banks

in swaps for yen.

The Finance Ministry is using some of the nation's

foreign reserves to make dollars available to banks, the

first time the ministry has ever acknowledged doing so.

Finance Minister Kiichi Miyazawa confirmed that the

funds had been lent but refused to disclose the amount

or identify the recipients.

Feeling the squeeze

Major Japanese banks need to raise an average of

$20-30 billion by the end of December, according to

some bank analysts and economists. The money is

needed for settlements before corporate book closings

at the year-end and the fiscal year-end.

Some Japanese companies with operations overseas

are expected to feel the credit squeeze, too, because

they often rely on foreign-currency loans from Japanese

banks.

Some banks are even asking companies with high credit

ratings, such as Tokyo Electric Power Co., to raise

dollars and provide them to their customers.

Foreign banks have been reluctant to provide credit to

Japanese banks because of their low ratings, said

Taisuke Tanaka, director and strategist of the global

foreign-exchange division at Credit Suisse First

Boston's Tokyo branch.

He added that the situation got much worse this year

because many foreign banks were hurt by losses of

Long-Term Capital Management, the speculative

U.S.-based hedge fund rescued from bankruptcy in

September, as well as by the financial crises in Russia

and Brazil.

Many foreign banks end their financial year in

December.

Distorted yields

Naturally, foreign banks will avoid any credit risk that

may mar their balance sheets, Tanaka said.

The difficulty Japanese banks face in raising dollars is

causing distorted yields in short-term money markets.

Only a few major Japanese banks are able to raise

U.S. dollars in the Eurodollar market, said Kazuto

Uchida, chief strategist of the investment strategy

division at Tokyo-Mitsubishi Securities Co. Other

Japanese banks are raising dollars by swapping

Euroyen funds with foreign banks.

Japanese banks are losing money on the transactions, in

effect a minus yield, Uchida said.

The yield on Japanese government three-month treasury

bills fell to minus 0.005% on Nov. 5, and trading

reached 5 yen00 million ( $4.1 million ) . The bill hasn't

been traded since.

Yen funds

The yield on the six-month treasury bill fell to minus

0.005% earlier in the month, and trading reached 1

billion yen. The yield settled for a while at 0% and since

has crept up to 0.03%.

The low yields indirectly show how desperate Japanese

banks are to raise dollars, Uchida said.

Foreign banks don't necessarily need to raise yen

funds, he said. They are seeking safe short-term yen

securities, and treasury bills are the only thing available.

They rushed to buy the bills, helping to send down the

rates.

If such distortions in the market continue, Japanese

banks that cannot raise U.S. dollars will be forced to

retreat from foreign markets, Uchida warned.

Another factor driving down the yield on treasury bills

is the near collapse of the Long-Term Capital

Management hedge fund. Last year, hedge funds sold

yen in the forward market for foreign banks, but this

year they are shying away from the high-risk vehicles.

The so-called Japan premium, the spread between

interbank rates abroad offered to Japanese banks and

banks of other money centers, has been rising. The

spread between the London interbank offered rate, or

LIBOR, and the average rate offered major Japanese

banks jumped to 0.935% last week, up 0.173 point

from a week earlier.

The spread is approaching the level it hit a year ago,

when the Japanese financial system was rocked by the

collapse of Sanyo Securities Co., Yamaichi Securities

Co. and Hokkaido Takushoku Bank in one month. In

early December, the Japan premium rose to 1.0-1.1

percentage point.

Japanese banks are also facing a bottleneck in domestic

short-term money markets. On Oct. 30, the overnight

noncollateralized call-money rate rose despite eased

monetary policy. The central bank provided 2 yen00

billion more than required to the market, but the average

rate went up by 0.12 point to 0.33%. The central bank's

target is 0.25%.

In the Euroyen offshore market, the situation is more

serious. The Tokyo interbank offered rate, or TIBOR,

on three-month maturities has risen to 0.729%, almost

equivalent to the 0.76% rate before the central bank

decided to guide rates downward last month.

To counter this trend, the Economic Strategy Council,

an advisory body to the prime minister, has told the

government that it should provide dollars to Japanese

banks through foreign reserves and swaps between

banks and the central bank.

Fund-raising by Japanese banks through dollar-yen

swaps is now decreasing, said Ryohei Muramatsu,

manager of the treasury and foreign-exchange division

at Commerzbank's Tokyo branch. One take on the

situation is that Japanese banks have met their goals.

Extending loans

The government has also decided to expand dollar

loans through the Export-Import Bank of Japan to

overseas subsidiaries of Japanese companies. The

loans are expected to total more than $3 billion by the

end of March.

Interest rates on the loans would be 0.5 percentage

point above LIBOR, which is lower than dollar loans

from Japanese banks. The government is also said to

be considering dollar loans to Japanese banks.

Market analysts are skeptical about the effect the

government measures will have. Using the

foreign-currency reserves has been regarded as a taboo

by the Finance Ministry, said Tanaka of Credit Suisse

First Boston. If the banks require more than $1 trillion,

the ministry would be forced to sell U.S. bonds.

These distortions in the short-term money market are

basically caused by the low credibility of Japanese

banks, said Uchida of Tokyo-Mitsubishi Securities.

From March 2001, the accounting system of Japanese

financial institutions is scheduled to change from the

current cost method to the market-value method, and

Japanese banks will be forced to disclose their latent

losses. Japanese banks have to reform themselves by

then. Time is running out.

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