Sanctity of Contracts?

A year ago or so there was much consternation about the encroachments into the sanctity of contracts in the United States, especially if judges could modify private mortgage contracts. Then again in the bankruptcy of GM and Chrysler the sanctity of contracts, and in particular the rights of senior debt holders, was arguably undermined.

However, the spotlight has shifted. A couple of weeks ago, Chinese officials made it clear that they were supportive of attempts by some state owned enterprises to back-out of, or otherwise mitigate the losses stemming from losing derivative trades, following reports that some SOE have lost billions of dollars.

Today, though Japan is in the news. The newly appointed head of the Financial Services Agency, Shizuka Kamei, surprised many right out of the box calling for around a three year moratorium on loan repayments by some small and medium sized businesses, ostensibly to avoid bankruptcies.

Part of the reason small and medium sized businesses are being squeezed in Japan according to Kamei is that they are not being supported by Japanese banks. Japanese banks, like banks in Europe and the US are reluctant to lend and instead appear to have been increasing their purchases of government bonds, helping to push yields down. Japanese banks hold a record amount of government debt.

Kamei is mistaken if he thinks a government induced moratorium, for which he acknowledged a plan has not been fully worked out, will bolster credit growth or renewed lending. Quite the opposite. Now the proverbial cat is out of the bag, why would a bank lend to a small or medium sized business for one of two years, knowing the government could force an extension of the tenor.

Interestingly too, Kamei, a former LDP transport and construction minister, will also take responsibility for Japan Post. He is opposed to its privatization and is one of the reasons he quit the LDP to from his People's New Party. Keeping the public ownership of Japan Post may be somewhat beneficial to the private banks, who would have to compete with it otherwise. Also, as the DPJ ruling coalition may find that the bureaucrats/civil servants are a powerful entrenched adversary and that may prove more difficult to dislodge than the LDP.