The two most talked about themes in the capital markets right now are jumbo issuance and the changes that will occur as a result of the introduction of the euro. Many of our readers will be able to quiz issuers directly at our Borrowers and Issuers Conference in mid-June. Victoria Whitenton, treasurer of Freddie Mac, for one will be there hoping that "at the Euromoney conference we will get feedback both from investors who have participated and those who have remained on the sidelines".
But in this, our special borrowers and issuers edition, we also look at both topics. On page 39 Peter Lee examines the Euromarkets' new-found obsession with liquidity and asks whether we are seeing a fad or a fundamental change in issuer behaviour. On page 47 James Rutter quizzes some of the market's most knowledgeable borrowers about the euro, liquidity and their plans for 1999. It makes surprising reading.
In this issue we also profile those borrowers, deals and dealmakers that have most impressed us and the market over the past year. From giant euro6 billion syndicated loans and $100 million asset-backed issues to nail-biting debut sovereign globals, we pick the best from the most significant markets and countries.
Death by a thousand cuts
Experienced Japan watchers are getting ever gloomier about the country's prospects. They cannot see any way out of the present gridlock. The banks, all their time and resources focused on non-performing assets, have reduced new lending so dramatically that the real economy is grinding to a halt. The rate of corporate bankruptcy is increasing and each new Tankan survey is more despairing than the last. Lack of liquidity is forcing good as well as bad out of business, creating more problems for the banks and forcing them to cut lending further.
The banks will not reform themselves. Without the discipline imposed by angry shareholders, they have never chosen to face today's problem today. Every year, western investment banks wait eagerly for March 31. Every year, they make more and more, as the window-dressing gets more difficult and complex.
This year credit derivatives have been the trade of choice. The version chosen shows just how little interest the banks have in reform. The favourite trade is a short-dated step-up premium callable default option. The initial premium is low, so this year's accounts are spared, and the trade is unwound after the year end when the cost can be taken. The balance sheet problems return.
To break the vicious circle of bankruptcy and credit crunch, Japan needs a national bad bank - a US-style Resolution Trust - into which impaired assets are sold at realistic market prices. The banks that cannot absorb the consequent write-offs have to be allowed to fail, though the depositors should be compensated. The banks, much reduced in size, must then start lending again.
The problem is this. Admitting there is a crisis means admitting someone is to blame and then apportioning that blame. In the US, when the scale of the Savings & Loans crisis became clear, the failure of the regulators was acknowledged and changes were made. In Japan those to blame - the central bank, the ministry of finance and others - are unwilling to shoulder responsibility in case they lose power or influence to a competing institution. And government leaders apparently cannot stomach the wholesale firing of these failed bureaucrats.
Under these circumstances, with government leaders unwilling to act decisively and with real social pain increasing, you would expect a popular backlash. The democratic process would be the catalyst for change, either electing a new government on a reform ticket or forcing reform upon the incumbents.
In Japan this won't happen either. First, Japan's democracy is too weak to perform this function. Second, and more important, people generally do not march in the streets demanding to be made unemployed. That is what a demand to restructure Japan's banking system (and so the rest of its economy) would effectively be, in the short term at least.
So the current decay will continue. Government stimulus packages will get larger. Growth will hover just above zero. The country's net debt and fiscal positions will worsen. Companies will go bust more often. Occasionally a bank will fail. Foreign banks will continue to cherry-pick the juiciest par assets and the most saleable junk from the Japanese banks as they try to shrink their balance sheets, worsening their credit quality and reducing their capacity to lend still further.
Bankers and politicians outside Japan have given up. They know that if the system is left to reform itself there will be no reform until Japan hits the wall and hard. By then, for south-east Asia, China and the rest of us it may be too late.