This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 03 TAIPEI 000244 
 
SIPDIS 
 
STATE PLEASE PASS AIT/W AND USTR 
 
STATE FOR EAP/RSP/TC, EAP/EP AND EB/IFD/OIA 
 
USTR FOR SCOTT KI 
 
USDOC FOR 4420/USFCS/OCEA/EAP/LDROKER 
USDOC FOR 3132/USFCS/OIO/EAP/ADAVENPORT 
 
TREASURY FOR OASIA/ZELIKOW AND WISNER 
 
TREASURY PLEASE PASS TO OCC/AMCMAHON 
 
TREASURY ALSO PASS TO FEDERAL RESERVE/BOARD OF 
GOVERNORS, AND SAN FRANCISCO FRB/TERESA CURRAN 
 
Sensitive but Unclassified 
 
E.O. 12958: N/A 
TAGS: EINV EFIN ECON TW
SUBJECT: Taiwan Financial Reform Sinks in Political Mire 
 
SUMMARY AND COMMENT 
------------------- 
 
¶1.  (SBU) It appears unlikely that Taiwan's legislature (LY) 
will provide supplemental funding for the Financial 
Reconstruction Fund (FRF) before the scheduled end of the 
current session on January 21, 2005.  The failure to re-fund 
the program will cripple efforts to consolidate Taiwan's 
financial institutions and reduce bad debt, the key 
priorities in Taiwan's effort to improve the health of its 
financial sector.  The failure to reach a compromise between 
opposition and ruling party FRF funding proposals 
illustrates a broader problem in Taiwan of how narrow 
political interests and micromanagement block progress on 
issues widely recognized as national priorities.  END 
SUMMARY AND COMMENT. 
 
Top Financial Priority Goes Nowhere in LY 
----------------------------------------- 
 
¶2.  (SBU) Although the current session of the Legislative LY 
is scheduled to end on January 21, the ruling DPP and 
opposition (KMT and PFP) parties appear unable to reach 
agreement on supplemental funding for the FRF fund designed 
to help Taiwan's problem banks and other financial 
institutions deal with mountains of bad debt and exit the 
market.  The supplemental funding bill was listed by both 
ruling and opposition parties as one of the priority bills 
to pass during this session, and had been singled out by 
Premier Yu Shyi-kun, Finance Minister Lin Chuan, and 
Monetary Affairs Commissioner Gary Tseng as the most 
important piece of pending financial legislation. 
 
FRF Key to Improving Financial Health 
------------------------------------- 
 
¶3.  (SBU) After the Asian Financial Crisis and global 
collapse of high-tech stocks, Taiwan began a program of 
financial reform focused on improving the health of its 
financial sector by reducing bad debt levels.  Since the 
reform program started in 2001 it has used both incentives 
and sanctions to reduce bad loans held by Taiwan's financial 
institutions by over NT$1.3 trillion (US$41 billion at NT$32 
per US dollar), over half of the total.  The FRF played a 
key role in this accomplishment by facilitating the purchase 
of bad debt and allowing problem institutions to be 
purchased by healthy institutions.  The successful sale of 
the insolvent Chung Shing Bank in December 2004 completely 
exhausted the FRF's original funding and left it with 
unfunded outstanding commitments to reimburse some of Chung 
Shing's creditors.  Supplemental funding is also needed to 
address ten other problem banks and the several problem 
credit departments of farmers' and fisherman's associations 
(FAs).  Under current legislation designed to spur rapid 
resolution of problem financial institutions, the FRF faces 
mandatory dissolution in July 2005. 
 
Willingness to Compromise on Amount 
----------------------------------- 
 
¶4.  (SBU) A year ago Taiwan's Bureau of Monetary Affairs 
estimated the FRF would require NT$330 billion in additional 
funding to assist problem financial institutions eliminate 
bad debt and exit the market.  In 2004 Taiwan's Financial 
Supervisory Commission (FSC), deferring to the budget 
deficit, only requested supplemental funding of NT$222.1 
billion (US$6.9 billion).  The bulk of this amount, NT$193.1 
billion, was to assist the ten Taiwan banks with high levels 
of bad debt.  Another NT$29.1 billion of the request was to 
deal with problem FA credit departments.  Opposition party 
LY members proposed cutting the supplemental funding amount 
by over half to NT$100 billion (US$3.1 billion) with the 
NT$29 billion to assist problem FA credit departments 
preserved intact, but with less funding for problem banks. 
The attention to the FA's reflects their political clout in 
rural areas. 
 
¶5.  (SBU) Taiwan financial officials told AIT that Taiwan's 
financial agencies were open to compromise on the amount of 
supplemental funding for the FRF.  Problem banks could be 
ranked according to the severity of their bad debt burden 
and supplemental funds used on the most needy cases.  FRF 
would use whatever funding was provided to deal with as many 
problem financial institutions as possible before it was 
dissolved in July 2005. 
 
New Element to Supplemental Funding Bill Blocked Compromise 
--------------------------------------------- -------------- 
 
¶6.  (SBU) In mid-December 2004 opposition Legislators 
proposed an additional element to the FRF supplemental 
funding bill that would require the Chinatrust Commercial 
Bank (CCB) to repay the original capital subscriptions of 
members of the Fengshan credit coop that CCB acquired out of 
receivership in April 2004.  CCB received FRF compensation 
to make up the gap between liabilities and assets, but the 
original capital subscriptions were not included in the 
calculation of compensation.  Since financial reforms began 
in 2001 the number of credit coops has been reduced from 74 
to 32.  Some credit coop and FA credit department closures 
have taken place in spite of public protests by FA employees 
and members.  Retroactive repayment of the original capital 
of the credit coop that CCB acquired would set a precedent 
for retroactive payments to others of the closed credit 
coops and FA's. 
 
Political Interests Come to the Fore 
------------------------------------ 
 
¶7.  (SBU) Some opposition party LY members have publicly 
noted that the 50,000 members of the Fengshan credit coop 
that CCB acquired could translate into 50,000 votes in the 
next election.  If the compensation were extended to other 
closed credit coops and FA's it would affect many times that 
number of people.  . 
 
No Funds Left 
------------- 
¶8.  (U) The FRF has assisted 46 problem financial 
institutions, including 37 FA credit departments, eight 
credit coops, and two large banks since 2001.  Resolution of 
these problem financial firms reduced the FRF's original 
funding of NT$140 billion to NT$13.7 billion, insufficient 
to pay the NT$64.1 billion debt that the FRF promised to 
Chung Shing's creditor banks in December 2004 (the Ministry 
of Finance is the guarantor of this commitment). 
 
Comment 
------- 
 
¶9.  (SBU) Failure to provide any supplemental funding for 
the FRF would be a serious setback to Taiwan's financial 
reforms.  Although Taiwan has reduced bad loans by over half 
since 2001, a number of banks and credit coops are still in 
poor financial condition.  Eleven of Taiwan's 49 banks 
report NPL ratios above 5% (principal or interest three 
months or more overdue).  Although disappointing in its own 
right, the LY's failure to act on the FRF servers as a 
broader reminder that partisan politics continues to impede 
serious policymaking, even after the major elections in 
¶2004.  Leaders in both camps continue to speak 
optimistically of a new era of cooperation on legislation 
that is in the public interest, but the track record since 
December 11 suggests that the next LY, which will look very 
much like the last one, may be just as ineffective. 
 
PAAL