Root Out The Rot In Asia's Banks

Bad banks were at the heart of Asia's crisis. Two years later, they're still a mess. The scandal swirling around Indonesia's Bank Bali is a catastrophe. It's also a threat to the country's hopes for recovery. For if Standard Chartered PLC walks away from the deal to buy Bank Bali, Indonesia will miss an opportunity to clean up its financial system.

South Korea's case is every bit as bad as Indonesia's. Despite repeated promises to sell two failed banks to foreigners, the deals have stalled. Seoul formally pulled the plug on an agreement to sell Seoul Bank to HSBC Holdings PLC at the end of August. It now plans to spend an additional $4.2 billion in taxpayers' money to prop up the bank--in addition to the $1.25 billion it has already pumped in. Moreover, despite Kim Dae Jung's pledge in July to Bill Clinton that a deal had been done to sell Korea First Bank to a group of U.S. investors, that agreement also looks like it's dead in the water. Kim Dae Jung had a golden opportunity to cut the ties binding the chaebol, the banks, and the government. But he seems determined to let it slip away. Although the government says that it's a matter of price, the real issue, it seems, is an unwillingness to give up control to foreign bankers, regardless of the skills they might bring or the boost they would provide to a Korean economy.

Asia's strong snapback is breeding complacency among its leaders. The worst of the crisis is past. But that's no excuse for slackening on reform. Rotten financial systems were at the heart of the crisis. Asia lets the rot continue at its peril.

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