ALMATY (TCA) -- The Kazakh Government has admitted that the first Kazakh bank, the same that the state pumped most of its support money into, is about to default on its international liabilities. But the apparent reason for this, an abundance of outstanding loans from Kazakh banks to corporate and personal debtors, which the bank is unable to cover, becomes questionable if one looks at figures and trends. Having overcome a momentary slump in reserves, banks now find themselves in a situation that strongly indicates that the financial crisis in Kazakhstan has, to a large extent, been home-made.

Bank TuranAlem, Kazakhstan's leading bank in terms of cash volume turnover in which the state recently seized a share close to 80 percent of common stock, will have to try and have its outstanding loans to international bank syndicates rescheduled, media reported last week. The total debt abroad by BTA amounts to the equivalent of 11 billion US dollars.

Paying up on time would drain the bank's deposit reserves, according to the bank's new board which is now controlled by state representatives. Figures provided by the National Bank of Kazakhstan show that the overall provisions of the country’s banks to date stand just below 15 percent of the total lump sum of outstanding loans, while the minimum safety level is considered to be around 30 percent.

Into a net recession

It is just the latest bad news about the worsening situation in Kazakhstan 's overall economy. Last week, the Government published figures, demonstrating that the current year is seeing not just a slowdown in economic growth but has plunged into a net recession. In January, the country's gross domestic product contracted by 1.2 percent on-year, in February by 1.8 percent and in March by 0.2 percent. A report by the Kazakhstanskaya Pravda quoted Economy Minister B. Sultanov as predicting an overall 2 percent net decline in the country's national economy for the current full year.

By comparison, the Russian Federation posted a net year-on-year decline in GDP of 10.4 percent in January and of 8.7 percent in February this year. Still, The Moscow Times quoted Deputy Minister for Economic Development Andrei Klepach as putting the expected economic contraction for this year at 2.2 percent from the previous year. Novosti, in a report on April 23, quoted Klepach as putting March’s GDP decline at 9.5 percent on-year - the same figure as his estimate for the first three months as a whole.

For the second quarter, Klepach predicted a further decline of up to 10 percent on-year. The official believes, however, that the economy will pick up by up to 2.8 percent in the second quarter this year. All this mirrors a recent estimate by the International Monetary Fund which puts on-year recession for 2009 at around 6 percent.

National cash drain

The overall cause for the setbacks both in Russia and Kazakhstan is clear to see. Accumulative hedging, putting debts on top of other debts, has sent liabilities through the roof at the detriment of expenditure. The result is that for this year, Russia will need to spend 34 percent of its cash reserves to refinance external debts (the bulk of which being owed by banks) whereas in Kazakhstan the figure stands at 82 percent.

In Russia , cash in circulation decreased from 4.4 trillion roubles to 3.7 trillion between January 1 and April 1 this year, Novosti wrote in a separate report. The main reason was that in order to protect themselves against the national cash drain, people hedge their personal reserves in roubles in western currencies, mainly euros and US dollars, the agency noted. This sends spending, both in terms of investment and retail purchasing, down, resulting in GDP decline and forcing equally-measured downscaling on the supply side.

Credit default swaps

The overall conclusion to be drawn is that making more money flow from one place to another does not turn it into more money. Pretending that it does only devastates money's purchasing power all the more. The key word for this is securitisation, according to a recent article in The Moscow Times by Robert Skidelsky, a Member of Britain's House of Lords and one of John Maynard Keynes' biographers.

The term really means filling one hole by digging a bigger hole, and another hole for the second one and so on. Skidelsky dubs the scheme "... a wonderful system of diversifying individual bank risk, but only by magnifying the default risk of all banks that held what came to be called toxic debt. Because all the derivatives were based on the same assets, if anything happened to those assets, all the banks holding the debt would find themselves in the same soup. [...] This scalability was magnified by the use of credit default swaps, which offered phony insurance against default. [...] Credit default swaps magnified the size of the bubble by hugely speeding up the velocity of monetary circulation. The market for collateralized debt obligations grew from $275 billion to $4.7 trillion from 2000 to 2006, whereas the market for credit default swaps grew four times faster, from $920 billion in 2001 to $62 trillion by the end of 2007."

‘Of domestic origin’

Those who argue that this is due to the former Soviet republics being dragged into the whirlpool of global financial contagion tend to overlook certain facts, according to William Gissy and Hans Rau, two teachers and researchers at the Bang College of Business, which is part of Kazakhstan's leading economy and business academy KIMEP in Almaty. Their observations, having looked at the ratio between outstanding loans to domestic borrowers and those taken from foreign sources, is that the latter have been excessive and unjustified by domestic demand for credit.

"For a contagion effect to be valid [in Kazakhstan ] there would have to be a contraction in bank lending," their report, presented in a KIMEP symposium last week, reads. "There was such a contraction in 2007- 2008 in Kazakhstan which lagged the main period of the global crisis. Secondly, the loan contraction would have to be liquidity generated rather than a crunch following a credit boom. Although there was a credit boom preceding the contraction there was a sharper drop in the level of bank reserves than in the volume of loans. The amount of loans relative to reserves increased which indicates a willingness to lend on the bank's part. Therefore it appears that the loan contraction was liquidity-driven. The final required observation is that the liquidity contraction be related to a decline in foreign funds due to the global crisis. Unfortunately, monthly data are not available but the indication from the annual data is that the decline in bank liquidity during 2007-2008 was domestic in origin."

Decline in bank deposits

If global trends set the scene, the actors in the play have all been Kazakh. Due to this securitisation, demand among net consumers of those commodities produced by Kazakhstan (with the exception, perhaps, of cereals) fell sharply in summer 2008, resulting in their prices dropping steeply. In Kazakhstan even more than in Russia , the effects have rippled through all levels of the economy. Consumers saw their personal income retreat substantially, with little protection against rising prices due to lack of sufficient domestic manufacturing activity.

This, rather than the assumed confidence crisis, explains the run on bank deposits that appears to have taken place towards the end of 2008. Both wholesale and retail traders found themselves without enough income on their trade to secure payment for sustained supplies; they therefore had no choice but to use their cash reserves - hence the sharp decline in bank deposits. These deposits appear not to have been replaced by sufficient new returns from economic activity.

Putting plasters on wounds

Facing the threat of an overall banking collapse, policy makers had no choice - state intervention made up for the loss in bank provisions which explains the latter's swift recovery. But that recovery seems cosmetic and doesn’t indicate a recovery in terms of real economic activity. The consequences for further economic trends will only be understood when the overall macroeconomic results for the CIS come out in middle of May.

Whatever effects state intervention in financial mechanisms has had so far will be shown by hard figures. One thing seems pretty sure, though: state authorities can get out the sticking plasters, but the cure has to come from the very base and cannot possibly be done with the stroke of a pen. Governments have their own worries, and need all the cash they have to address them.

But a tangible pick-up of economic activity on all levels is the only thing that can make the economy itself pick up. In the end, people want to live and preferably live well. Making it look like they are going to live well may generate some sort of confidence, but how to get it done is something economists now stuck in current academic debates should ponder on, not without searching for causes but certainly not without searching for ways of moving forward.

Source : The Times Source Of Central Asia