Tools to recalibrate economy

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The Vietnam Asset Management Company (VAMC), the main weapon to attack debts, is in place with VND500 billion ($23.8 million) in chartered capital at its disposal, the VAMC envisages tackling nearly VND100 trillion ($4.7 billion) in bad debts. Through issuing bonds for debt purchases, the VAMC seeks to address bad debt dilemma without using the state budget.

Senior financial expert Dr. Nguyen Tri Hieu, however, warned that to tackle such a huge bad debt amount, the VAMC would need to use big financial leveraging which was risky.

“Assuming that the VAMC bought VND50 trillion ($2.38 billion) worth of bad debts, it would need to pay commercial banks special bonds of the same value. Banks then take these bonds to the State Bank asking for refinancing with 50 per cent discount of the bond value to get back VND25 trillion ($1.2 billion). This means the VAMC could have around $1.2 billion in total asset value versus $23.8 million in chartered capital. VAMC’s financial leverage rate by that time will be 50/1, too perilous for a financial institution,” Hieu said.

In this case, VAMC’s chartered capital would even be contracted if one commercial bank dropped in its debt payment obligation.

In this respect, a commercial bank executive assumed VAMC going bankrupt was unlikely, but this would make banks think twice before ‘selling’ their bad debts for bonds.

At the Vietnam Business Forum in early June 2013, VBF co-chair Alain Cany said VAMC’s setup was a positive signal, but settling banks’ bad debts could not only resort to a single solution.

Economic experts claimed the VAMC could only tackle one-third of the total bad debts, while the government was set to fully deal with current bad debts by 2015.

Under the premier-approved project on tackling bad debts, not only banks, all ministries and government agencies must get involved in the push. The premier also required credit entities to collaborate with VAMC in addressing bad debts.

In addition, credit organisations and borrowers should incur major responsibilities for the arising bad debts and sharing losses in dealing with bad debts.

Meanwhile, state budget shall be on the hook for bad debts stemming from lending to priority subjects or to those under government assignments.

The government reportedly would resort to using debt instruments in dealing with bad debts. The prime minister has assigned the Ministry of Finance to map out plans on debt instrument issuances to help the government effectively tackle various debt issues.