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A panel of debtors and creditors on Friday drafted a set of guidelines for debt waivers in an effort to raise transparency in a system accused of distorting market principles.

Banks will not be able to forgive loans to troubled corporate borrowers unless the borrowers can eliminate excessive liabilities and produce profits within about three years, the draft says.

But without force of law, it remains unclear how effective the guidelines will be when finalized in late September.

Friday’s interim report was drafted, at the prodding of the Financial Services Agency, after only three meetings between members of the Japan Federation of Economic Organizations (Keidanren), the Japanese Bankers Association and experts.

Whether the guidelines work will be a key indicator for the government’s emergency economic package that calls for banks to eliminate existing nonperforming loans. Debt waiving is a method of disposing of nonperforming loans, with banks forgiving loans to large troubled companies.

The report sets numerical targets for companies as conditions for loan forgiveness and called for the management and shareholders to shoulder responsibility. The report is thus viewed as a step forward in articulating the role of debt waiving as a part of corporate restructuring.

But the stark difference between the stances of banks and corporations concerning debt waivers casts doubt on how much force of consensus the guidelines have.

“We will use the guidelines for reference,” said Akio Kioi, president of the Resolution and Collection Corp. “Every case has its own special situation.”

Banks say that burdening the system with too many rules will slow down debt waivers, at a huge cost to banks if major debtors go bankrupt.

Meanwhile, Keidanren officials have demanded greater strictness toward companies receiving waivers, accusing banks of favoring large corporations over small- to medium-size borrowers and also of keeping firms that should have failed alive.

Critics also say the process throws good money after bad, as banks close one eye on companies unable to make profits promised in rehabilitation plans submitted to creditors.

Of the 295 companies that received debt forgiveness between fiscal 1985 and 2000, supposedly to get back on their feet, a quarter ended up beaten by the market anyway, according to Teikoku Databank.

According to Friday’s report, companies under rehabilitation should in principle go through a court-ordered reconstruction process, with a debt waiver a last resort “in accordance with social and economic cost.”

While the report calls for executives receiving debt forgiveness to resign “in principle,” members promised that exceptions will be considered in the final draft.

And as “shareholders should take a fair share of responsibility,” the firms’ capital will also be reduced in principle, it says.

The report also says that rehabilitation plans mapped out when companies receive debt waivers should be subject to examination by lawyers, certified accountants and other experts.

Shinjiro Takagi, a professor of law at Dokkyo University and head of a working panel that drafted the report, said “The guidelines will not be backed by laws, but I believe that they will receive a certain degree of respect (from banks and companies).

“I would like to set specific time limits (for companies that receive debt forgiveness to return to profit), but there will always be exceptions,” he said.

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