In Malaysia there is now a variant of this game, where the debts of profitable subsidiaries are transferred to the parent while the debt-free spinoff is offered to the investing public. With the lifting of the chain listing rules, the stock market now becomes a gambling casino. See the Asiaweek story:

http://www.cnn.com/ASIANOW/asiaweek/business/2000/06/17/

There is an obvious difficulty in this creative financing. The total indebtedness of Malaysia, as an entity, does not change. Nor have the assets. It does not retire any debt. No losses are written off to clear the balance sheet for a fresh start. Yet new money is to be attracted into the market (which the sellers state will be used to pay down the transferred debt).

But the parent company assumes a debt, this reduces the stockholder equity, and the stock of the parent goes down an equivalent amount (if anybody has paid attention). Thus the whole exercise depends on stealth, merely postponing a day of reckoning. Malaysia is adept at games of this sort, and the investing world is jaded by what is widely seen as an ongoing effort to camouflage from the public what insiders know to be a serious situation.

The Lion Group, said to be the second largest debtor in Malaysia, has revealed this week plans to resolve problems through sale of assets, including a profitable Malaysian steel mill. Among other adversities reported is the difficulty of escaping the label NPL (non-performing loan), which becomes a warning flag to potential lenders. Lion has managed to avoid this through a series of adroit manoeuvres, which reflect the general mentality throughout Malaysia. It is a morass in which the government is seen as willing and witting partner.

A credibility gap has arisen because the government ministers are at the same time directors of the economy and active businessmen with substantial personal assets acquired while in office. Their statements are weakened by public knowledge that they are protecting and promoting their own wares.

One means of borrowing money is to issue bonds. Bonds have a rating as to their creditworthiness. This rating reflects the risk, which is another way of guessing the odds of ever getting your money back. It also reflects the integrity and credibility of the borrower (the issuer of the bonds). Candidness counts. There is a rate of interest associated with a bond at the time of issue, and the desirability of holding a bond directly affects its value as a trading vehicle.

There is a direct relationship between the interest rate and the trading value. The higher the interest rate the more valuable the bond, thus the value of a government bond tends to fluctuate relative to the international bond market. A low interest rate, along with a high risk rating, tends to depress the market value of the bond. Failure to make timely interest payments as agreed places the bond issuer in default, and the bond becomes a form of non-performing loan.

When the state is an issuer of bonds to fund its infrastructure projects it enters this market, sometimes in a big way. The interest rate set by the national bank is important, not only to potential borrowers desiring to make new loans, but also to the holders of all the previous bonds now in circulation. When the interest rate goes up, borrowers hesitate to make new loans.

But sometimes there are inflationary pressures, such as demands for a national minimum wage, and to counter this the central bank may desire to increase the interest rate in order to maintain a low inflation rate. This, however, tends to brake an economic recovery that is fragile, so there are counteracting forces. In general, governments prefer a high unemployment rate to inflation. This is not good news for wage earners.

Governments spend money to create cash flow in the economy, priming the economic pump, and in order to do this they must either have cash available or borrow from those who do. And in order to borrow, in the form of issuing new bonds, they must compete with other borrowers. The more they borrow, the more they have to repay, and the rate of interest they must offer to peddle the bonds can significantly affect the financial standing of the country.

Malaysia is a big player in the money market, pegging the ringgit to the dollar in an effort to remove the foreign exchange risk factor. There is thus real incentive to give an appearance of creditworthiness and candour, in the form of full disclosure. The ministers are therefore at great pains to present the best possible picture.

But lenders with experience tend to be suspicious people. They can smell a lie. They can sense dishonesty at a distance. The borrower must not only come with clean hands, he must be seen to have clean hands. Malaysia has a problem here.

The government of Malaysia, represented by Economic Adviser to the Finance Ministry Mustapa Mohamed, says that all the underlying factors are positive, and there is no reason to be concerned with recent market weakness. His reassurances, however, are not shared by others.

Phillip Dingle, chairman of the Malaysian International Chamber of Commerce and Industry (MICCI), in a speech given at the chamber's annual luncheon with the Ministry of International Trade and Industry (Miti), warned that the negative perception of the judiciary by foreign investors lowers enthusiasm for ventures in Malaysia.

Dr Mohamed Ariff, Executive Director, Malaysian Institute of Economic Research, is an experienced economist. In a NST article, "Restructure while the going is good" (June 25), he explains why basic structural change is necessary. But he sees a "lack of political will" to enact the necessary reforms.

The chairman of the Human Rights Commission, Musa Hitam, in a speech given on May 19 to an Umno branch ("Change yourself before you're changed", May 6-7) advises that substantial change in the political management of Malaysia's affairs is imperative.

Megat Najmuddin Khas, President of the Malaysian Federation of Public Listed Companies, said Malaysia "needs better judges" ("We need better judges to counter low confidence", June 21). He warns that future growth depends on attracting foreign direct investment.

The abnormal delay in clearing cases, ranging up to eight years, is unacceptable. The inability of the judiciary to clear the backlog, and the clouding of public perceptions of judicial independence by performing questionable extended trials of public figures (who have criticised the government) lends credence to allegations of political interference.