By Stuart Grudgings
Oct 10 (Reuters) - When one of Vietnam's richest andbest-connected bankers was arrested in August, a move that sentthe country's stock market tumbling, a little-known blog brokethe news hours ahead of state media.
It was the first sign that the Quan Lam Bao website could bea window into mounting leadership tensions as the Communistcountry wrestles with the deep economic woes that have shatteredits image as one of Asia's hottest emerging markets.
The site, whose name means "officials doing journalism", hasbecome one of the country's most-visited as it pilesoften-savage criticism on Prime Minister Nguyen Tan Dung,accusing him of greed, cronyism and economic mismanagement.
Some of the attacks posted on the site and two other blogshad to come from party insiders, according to a party member whodeclined to be identified and several academics who followVietnam's secretive politics. They say the sites reflect intenseinfighting over how to deal with the country's debt-ridden banksand state firms.
Under mounting criticism for failing to adapt to theglobalised market economy, Hanoi's top leaders began a summitlast week - only days after ratings agency Moody's downgradedVietnam's sovereign credit on concern its debt-swamped banks mayrequire a large bailout.
Many observers expect President Truong Tan Sang to try towrest back more control of policy from Dung, a former centralbank governor accused by critics of having cozy ties withwealthy businessmen and who has been closely associated withmissteps at financially-strapped state firms.
"They have to make some tough decisions," Adam McCarty,chief economist at the Mekong Economics consultancy, said of theCommunist leadership. "They've run out of wiggle room."
"Some rich people and rich groups are going to have to writeoff a lot of assets and a lot of wealth. The struggle is overexactly who," said McCarty, who's based in Vietnam.
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on credit, GDP: ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> DECAY OF POLITICAL MORALITY?
Sang has taken a public stand against cronyism. Before thecurrent meeting of the Central Committee, the party's mostpowerful body, he blamed a decay of political morality forVietnam's problems. But analysts see the rivalry between Sangand Dung as largely a power play, and doubt that either isprepared to make the tough economic reforms Vietnam needs.
Crucially, there has been no discernable drive to end thebanking system's glaring lack of transparency. It's unclear howsolvent banks are, who owns them and how much of their lendinggoes to insiders for their own businesses.
"Without reinforcing transparency and banking discipline,banking reform will be a wild-goose chase," said Cao Sy Kiem, aformer central bank governor who is now a member of the NationalMonetary and Fiscal Advisory Council.
The Moody's downgrade was the latest blow for a formereconomic star of Southeast Asia in the wake of a credit bingethat has turned sour, leaving huge debts and imbalances.
Fueled by reforms first launched in the 1980s, economicgrowth hit 8.5 percent in 2007. But the government now expectsthe economy to expand only 5.2 percent this year - well belowits earlier target of 6.0-6.5 percent. While much of SoutheastAsia is attracting significantly higher levels of foreign directinvestment, Vietnam in the first nine months drew 1.2 percentless than a year ago.
SLUMPING REAL ESTATE
The country's banks are heavily exposed to a slumpingreal-estate sector and indebted state firms. Total bad debts areestimated at up to $15.6 billion based on the central bank'smost recent figures. Analysts believe the real figure is muchhigher.
Cleaning up the bad loans will require some form of bailout,but a $5 billion debt resolution plan by the central bank and aseparate plan by the Finance Ministry appear to have stalled.
One sign of worsening problems at banks is their failure topass on the benefits of the central bank's five interest ratecuts this year to companies. Rather than disburse fresh fundsand risk adding to their debt pile, banks appear to be rationingfunds for the growing prospect of a rainy day.
Banks' deposits rose 11 percent in the first eight months ofthis year while credit rose just 1.4 percent from a year earlier-- a shock for an economy whose expansion was driven bydouble-digit annual credit growth over the past decade.
"It's very difficult to get loans at the moment. It's themost difficult time in years," said Tong Trong Nghia, directorof a furniture-making company that employs 70 people in Bac Ninhprovince, 30 km (18 miles) east of Hanoi.
Nghia said his output had plunged 40 percent this year andthat production at many businesses had come to a standstill.
An imminent full-blown banking crisis is unlikely butslow-burn stagnation is a danger without bold reforms to dealwith the bad debts and shed light on the banking system's realstate.
Authorities did take dramatic action with their August swoopon Nguyen Duc Kien, the wealthy founder of Asia Commercial Bank. But his arrest on fraud charges appears to have been aone-off move and possibly reflected the intensifying leadershiptensions.
Political analysts say Kien is close to Dung, and see hisarrest as an attempt to undermine the prime minister, whosepower expanded after getting his post in 2006.
The emergence of Quan Lam Bao and the two other highlycritical blogs - Dan Lam Bao and Bien Dong - have added to thepolitical intrigue.
Despite being condemned publicly by Dung in September as "awicked plot by enemy forces," the three sites continue topublish, heightening suspicions that Dung's rivals in theCommunist Party could be involved.
That would be a supreme irony in a country where bloggersface long jail sentences for questioning the government.
Quan Lam Bao is thick with innuendo and insider terminology,referring to Dung as "3D", a "monster" and "the nurse" - thelast a reference to his role during the Vietnam War.
Several posts have blasted Dung for supporting failing banksand state enterprises.
"Vietnamese people can clearly see that the Politburo hasmade serious mistakes as it tolerated 3D," said one post lastweek, adding that he had "become a monster that no one cancontrol."
(Additional reporting by John Ruwitch in Shanghai; Editing byJason Szep and Richard Borsuk)
Keywords: VIETNAM ECONOMY/