Courtesy of the Financial Times, a look at Zimbabwe’s latest efforts to use financial engineering to escape its fundamental monetary problems:

Since dollarisation in 2009, policymakers in Zimbabwe have failed to solve the problems created by weak banks in a bankrupt econokmy with an overcrowded financial sector. Policy – driven by politicians not technocrats – has been decidedly populist.

It is familiar bank-bashing (over excessive charges, punitive interest rates and a reluctance to lend to SMEs) and politicians demanding rescue packages for banks that get into trouble. Four banks including the country’s biggest have turned to the government for help in the last two years. Now there’s a new plan to set up a fund for bad loans with a Dubai investment company’s help.

Government’s finances are under intense strain – so much so that last week finance minister Tendai Biti appealed to South Africa for a $100m loan. As a result it has had to fall back on unconventional means to keep troubled banks afloat. One soft touch has been to resort to the state-owned National Social Security Association (NSSA) which has helped rescue two banks; a third was bailed out temporarily by some of the healthy banks.

Now Biti is trying to put a long-term bailout fund together in partnership with a Dubai-based private equity fund, Global Emerging Markets. The plan is to set up a $1bn fund, the Zimbabwe Resolution Corporation, financed by a ten-year bond issue backed by a government guarantee. Banks would be required to support the fund with a 2 per cent levy on their risk-weighted assets.

The ZRC would then purchase the bad loans of the banking system – that are heavily concentrated in the hands of locally-owned or indigenous banks. In mid- year, non-performing loans were $350m or 12.3 per cent of total bank lending. Eight of the country’s 24 banks had NPLs in excess of this average including six where bad loans exceeded a quarter of total lending.

The plan is getting a mixed press. Critics say the Reserve Bank of Zimbabwe’s call for a radical increase in bank capital from $12.5m now (for commercial banks) to $100m by mid-2014 is the way to go. They point out that the weak banks have been under strain for years and should either be merged with, or taken over by, the stronger units. “This rescue fund is just postponing the inevitable,” said one leading banker this week.

Others ask how an insolvent state – Zimbabwe’s external debt exceeds 110 per cent of GDP, with arrears of 70 per cent of GDP – can guarantee the ZRC bonds, especially at a time when the government is asking South Africa for a loan. Does that mean – they ask – that the South African Reserve Bank has now taken on the role of Zimbabwe’s lender of last resort?

The financial rational behind GEM’s plan is unclear to many banking observers. The fund is based on the optimistic assumption that today’s bad bank loans will become tomorrow’s good ones – that somehow bank creditors will be able to repay the ZRC so that the Zimbabwe government – and other investors, including the unfortunate NSSA, will not have to pick up the tab at some time in the future.

Hard-headed bankers are deeply cynical, especially so since a disturbingly high proportion of the bad loans is made up of insider lending to friends, family, employees and bank-owned businesses. The suggestion mooted by officials that local investors, including pension funds, will buy the bonds looks fanciful, and is unlikely to be realised unless the bonds pay a minimum of ten per cent.

The disappointment is that Zimbabwe needs bank restructuring, not a bailout fund to keep alive those whose life-support systems should have been switched off months, if not years, ago.