Tokyo Sidetracks National Credit Union Bailout Plan

A rebellion in the Tokyo city assembly on Thursday sidetracked a national government plan to rescue two bankrupt credit unions and spurred a new threat to the coalition government of Socialist Prime Minister Tomiichi Murayama.

Leaders of the opposition New Frontier Party demanded that Finance Minister Masayoshi Takemura--chief of the New Party Harbinger, one of three parties in the coalition--resign to accept responsibility for Tokyo’s rejection of his credit union rescue plan.

Although still a remote possibility, the dispute also carried the seeds of potential financial trouble.

Should the government prove unable to use taxpayer money for the planned $1.7-billion credit union rescue, far larger bankruptcies could upset vast sectors of the banking system, which is awash with bad loans.

Ultimate acceptance of the government’s plan to rescue the credit unions “is vital to avoid causing insecurity in the financial system,” Takemura said after five parties in the Tokyo assembly voted in two committees to remove a planned contribution of $300 million to the bailout from a special Tokyo municipal budget.

The full assembly is expected to approve the budget deletion next Thursday.

Local governments in Japan are in charge of supervising credit unions, and Tokyo’s contribution was regarded as the key to the bailout of the Anzen and Kyowa credit unions.

Members of both Murayama’s own Socialist Party and the Liberal Democratic Party, the major prop of Murayama’s coalition at the national level, joined the opposition New Frontier Party and two other groups to put the $300 million in a reserve fund. They then voted to entrust Tokyo’s new governor, who will be elected April 9, with the decision of how to use the money.

That move not only threw Tokyo’s contribution up in the air but also promised to transform the gubernatorial election into a political fight over the bailout. Neither Murayama’s coalition nor the opposition New Frontier Party has yet endorsed a candidate to succeed retiring Gov. Shunichi Suzuki.

Takemura said he regretted the local assembly decision but called it a postponement--not a rejection--of his rescue plan.

Opposition to saving the credit unions with taxpayer money erupted after revelations that heads of both financial institutions had lent money to themselves and had extended a total of $1.6 billion in illegal loans, or 70% of all their outstanding lendings of $2.3 billion. More than $1.1 billion of the loans were rated as uncollectible.

Both of the credit unions have filed accusations of breach of trust against their former presidents.

Failure to persuade the Tokyo government to go along with the rescue plan “would undermine the credibility of the Ministry of Finance and the Bank of Japan and would probably force the resignation of Finance Minister Takemura,” said Jesper Koll, head of economic and markets research at J.P. Morgan Securities Asia Ltd.