Asian Business Faces the Unthinkable: Chapter 11

That giant crashing sound from the Far East is not just the tumble of stocks and the fall of currencies. It's also the collapse of companies. Despite a long tradition of government intervention to avoid outright corporate failures, Asia is getting used to a new phenomenon: bankruptcy.

The economic forces that sent Asian stock markets plunging in late October - and pushed them down again in recent weeks - have already knocked several companies into insolvency.

Analysts expect more to follow. In the past several weeks alone, Japan's seventh-largest brokerage firm, Sanyo Securities, has gone bust, leaving its creditors holding some $7 billion in losses. It's the first failure of a large nationwide brokerage in Japan since World War II.

Indonesia has ordered the closing of 16 troubled banks, part of its pledge to clean up its financial system in return for as much as $40 billion in emergency loans from the International Monetary Fund and other sources.

South Korea's currency has fallen to record lows against the dollar, raising concerns that the country's shaky banks will not survive. Already this year, seven of South Korea's top 40 corporate groups have gone bankrupt.

"There's a different mentality on the role of government" in East Asia, says Glen Fukushima, vice president of the American Chamber of Commerce in Japan. The business community and the public expect governments to step in to keep large businesses from failing or, at the least, limit the damage from such failure, he says. But "no matter how much these governments intervene, I don't think they can stem the tide of these disruptions."

"In these global market conditions, any company can go bankrupt," adds Kunio Igusa, an economist with the Institute of Developing Economies, a Tokyo-based research institute.

The region's market conditions took another turn for the worse on Nov. 7, as Japan's Nikkei stock index fell below the 16,000 mark for the first time in more than two years and continues below that level. Hong Kong's Hang Seng Index declined 3 percent and continues to languish, and South Korea's stock market suffered its worst ever one-day decline with its main market index falling 6.9 percent. (See story below).

The decline in stock values is important, particularly in Japan, because banks invest heavily in the stock market. If the market falls below a certain level - perhaps 15,000 and certainly 14,000 as measured by the Nikkei index - analysts are concerned banks will be forced to sell off their holdings, triggering a massive market plunge and pushing weaker banks into bankruptcy.

On Nov. 7, Japan's largest regional bank, Yokohama Ltd., denied a news report it was selling its entire $5 billion stock portfolio but did admit it was selling some of its holdings to strengthen its own balance sheet.

In many ways, Japan had been the model for avoiding bankruptcy. Not only banks but large companies helped one another by buying one another's shares.

And though small companies were allowed to fail - an average of roughly 1,000 a month, estimates Iwao Nakatayi, economics professor at Hitotsubashi University in Tokyo - the Finance Ministry leapt into action when companies of any size began to totter by arranging a merger or takeover by a stronger competitor.

But the system has begun to unravel. In the past eight months, several medium-sized Japanese companies have declared de facto bankruptcy, including three construction firms, a large supermarket chain, and an insurance company.

The Finance Ministry most recently tried to avert a bankruptcy at Sanyo Securities, according to press reports, by urging financial companies to lend more money to the troubled firm. But this time Japanese companies did not come forward.

"The Japanese government's safety net is gone," says Shinichiro Takaya, chief strategist for the Yamaichi Research Institute, a market research firm affiliated with Yamaichi Securities in Tokyo. "The old convoy system no longer exists here."

The change stems from the increasing pressures on Japan's financial institutions.

First, the bursting of the nation's "bubble economy" at the beginning of the decade has forced banks and other lenders to carry huge portfolios of troubled loans. "No financial institutions in Japan want any more burden on their shoulders," Mr. Takaya says.

Second, Japan plans to liberalize its financial sector starting next spring, a process known as "the Big Bang." Banks, securities firms, and insurance companies will face increasing foreign competition.

"There will be more bankruptcies in the future, especially after the arrival of the Big Bang," says Susumu Takahashi, chief economist at the private Japan Research Institute in Tokyo.

A few years ago, domestic experts predicted 20 large Japanese banks would survive market liberalization, he says. Today, no more than five are expected to make it.

"This is the largest change since the end of the [Second World] war," says Toru Nakakita, director of Toyo University's economic institute in Tokyo. "I'm not very pessimistic at the moment. [But] it is inevitable that we make efforts to change."

Other East Asian governments are also reluctant to let companies fail, although often for different reasons. Perhaps the most striking example is Indonesia, where the government's attempt to close 16 struggling banks has angered some of the country's elite.

One of President Suharto's sons and and his half-brother have each sued the government for closing banks they own. But on Nov. 10, with the apparent support of the president, the finance minister stood by the decision to close the banks.