Vietnam: Moodys downgrade raises spectre of banking bailoutSeptember 28, 2012 7:50 amby Ben BlandThe fallout from Vietnams slow-burn economic and banking crisis continues to spread.On Friday, Moodys downgraded the Communist-ruled states sovereign credit rating because soaring bad debts have limited banks ability to lend, damaging the countrys medium-term growth prospects and raising the spectre of a costly government banking bailout.The downgrade came one day after police said they would prosecute Tran Xuan Gia, a former investment minister, for economic crimes because of his role as chairman of scandal-hit Asia Commercial Bank, a major Vietnamese lender that is 15 percent-owned by Standard Chartered.Moodys,which last downgraded Vietnam in December 2010, cut the countrys foreign- and local-currency government bond ratings to B2 from B1 and downgraded the ratings of eight Vietnamese banks as a result. By contrast, Standard & Poors, a rival of Moodys, recently upgraded Vietnamese banks, arguing that operating conditions were improving despite substantial risks of economic imbalances remaining.Despite the differing outlooks, it is clear how Vietnam got into this mess. Credit expanded rapidly as Vietnams economy opened up and took off in the last decade. But much of this easy money was channelled to wasteful state-owned companies and speculative real estate and stock market investing cronies, leaving Vietnams banks and corporate sector saddled with bad debts and the countrys reputation as one of Asias hottest emerging markets in tatters.The governments belated attempts to rein in excessive lending have succeeded in bringing soaring inflation under control. But they have also dented annual GDP growth, which has fallen to below 5 per cent from the pre-crisis trend of more than 7 per cent.With political leaders under pressure to react, dozens of state company executives, businessmen andbankers have been arrestedor convicted on charges of economic wrongdoing in the last year.But, with little transparency in Vietnams secretive criminal justice system, many observers believe that the apparent crackdown is being driven by political score-settling as much as a desire to restructure the ailing economy.The government has talked about setting up a debt restructuring agency to buy bad loans from banks a move that credit rating agencies and others say would be a good step forward. But Vietnams autocratic Communist leaders, who insist that only they can uphold national sovereignty, have baulked at the suggestion that they may need help from outsiders such as the International Monetary Fund to implement such a restructuring plan.Ultimately, without an accountable, transparent and painful process of the sort that Indonesia went through under the IMFs watch after 1998, Vietnam will struggle to resolve its problems and fulfil its undoubted potential.(447 words)Source : http://blogs.ft.com/beyond-brics/2012/09/28/vietnam-moodys-downgrade-raises-spectre-of-banking-bailout/#axzz28tYhIkJv