Greece and Iceland Financial Crisis Pose Warning for Vietnam

Vietnam should study seriously the experiences of two European countries which are Iceland and Greece although at the moment our situation is better. We have Official Development Aid (ODA), which means long term loans with low interest, and the total debit balance is not too high.
A company will go bankrupt if it can not pay off all its debts at the deadline, and so will a country. In 2009, Iceland fell into that situation. This year, Greece is also facing the possibility of bankruptcy.

If a company faced with bankruptcy is not bailed out by creditors or third parties, it can go bankrupt, be forced to sell its assets to clear its debts, and liquidate. It is hard for a country to be liquidated, but there is a high possibility of having to sell properties and selling concessions for lands and mines to clear its debts, or future generations will have to work their hands to the bone, and tighten their belts to pay off the debts.

Greek Syndrome
The Greek government had to raise taxes and reduce expenses to pay the interest and one part of the principal on its national debt of over 400 billion euros. People took to the streets to protest against the policies of tax increases and reduction in welfare programs.

Sixteen European finance ministers seemed to agree on the Greek rescue plan in a meeting in Brussels on 15 March, although the detailed plan has not been revealed.

Fell Into Bankruptcy
It is as simple as a family or a company. A government has to spend money to maintain the government apparatus, national security and defense, and development. Balancing the expenses, the government has receipts. If the expenses surpass the receipts, the government has to ask for loans inside or outside of the country. Printing money to settle will cause immeasurable inflation, which is another form of tax on everybody.

The domestic receipts of the government come from taxes, fees, sales of natural resources such as oil and coal, and other sources such as domestic loans and bond and treasury bill sales.

Foreign receipts include nonrefundable aid, which is not significant, foreign loans (ODA), and commercial loans, for example issuing bonds on the international market as Vietnam has done recently to raise $1 billion.

Ineffective use of loans, corruption leading to loss, loose tax collection and tax evasion, or insufficient taxation can cause debts to pile up and can easily lead to bankruptcy.

The press has said that Greece went bankrupt because of corruption and tax evasion. The credit rating of Greece fell from A- to BBB+, the lowest rating of European countries. A low credit rating makes it even more difficult to get new loans, and interest rates will be high.

Common Condition
Based on the experience of Iceland and Greece, the increasing debt, and the uses of the funds in Vietnam is cause for concern. The credit rating of Vietnam has just been lowered to BB- by Fitch, a global ranking organization providing data, research, and credit forecast independently for the international credit market. Vietnam's trade deficit has been continuously high for many years. Domestic and foreign debts of the government have increased rapidly, although they are reported to be at a safe level (less than 40 percent GDP is considered safe).

According to the Ministry of Finance, as of 30 June, 2009, Vietnam's foreign debt Vietnam equaled 29.8 percent of the Gross Domestic Product (GDP), $23.6 billion. After June 2009, Vietnam signed loans and loan guarantees worth nearly $4.5 billion in total - $1.205 billion with Asian Development Bank (ADB), $927 million with the World Bank, $1.33 billion with Japan, not including $290 million the Japanese loaned Vietnam at the beginning of March this year, and issued $1 billion of international bonds.

If all this money is disbursed, the foreign debt of Vietnam will increase to 35 percent of GDP, not to mention that the total domestic debt of the government is unclear. The concern is that the returns on spending and investment are not high, corruption and the thirst for investment on the part of state agencies have not been reduced, so debt will increase rapidly if there is not strict control.

Perhaps the National Assembly will discuss the bauxite projects, the high speed railroad project, the nuclear power project, and many other mega-projects. The Finance Ministry has just taken a decision on supplementing authorized capital for Agriculture and Rural Development Bank (Agribank) for an amount of more than 10.2 trillion Vietnam dong. All these mega-projects and financings of corporations and state units need huge amounts of money. The federal government is in debt, corporations are in debt, and localities are also in debt.

Diagnose and Treatment Needed
Ho Chi Minh City has just established the Ho Chi Minh City Financial Investment Company (HFIC) to mobilize capital from organizations and individuals inside and outside of the country, issue bonds, raise funds from financial and credit organizations, accept financial assistance, and managed-account funds.

Hanoi City is also developing a proposal for a foreign loan of billions of dollars. Perhaps Hanoi will also follow the example of Ho Chi Minh City to establish its own financial investment company.

Unclear About Other Provinces Activities
Not even mentioning that these state financial investment companies will prevent banks from mobilizing capital, I note that if local state financial investment companies and corporations are not under strict control, and make extensive loans for extensive investment at higher interest rates than the central government pays, it can push the country into debt and lead to the possibility of bankruptcy in the future, and our descendants will have to work hard to pay off the debts.

The thirst for investment can be the condition of any government if there is not strict control and supervision. There are many temptations and apparently good reasons for loans and expenses, but please do not put the burden on future generations.

We must identify clearly what the country must do, and invest in the army, the legislature, law enforcement, and infrastructure, for example, but the government should not do business, nor invest in business.