Arresting the rupiah's drop<\/p>\n
The new bold measures on corporate debts and bank
\nrestructuring announced by the Indonesian government yesterday
\ndirectly address the main causes of the wild volatility and
\ndownward spiral of the rupiah's exchange rate.<\/p>\n
A temporary freeze on the servicing of both the interest and
\nprincipal of corporate debts, called for in the measures, would
\nsoon arrest the strong demand for American dollars. The
\ngovernment guarantee to pay rupiah and foreign currency claims to
\ndepositors and creditors of all Indonesian incorporated banks
\nwould restore public confidence in the banking system and reopen
\nforeign credit lines to foreign exchange banks in the country.<\/p>\n
The removal of all restrictions of foreign ownership of
\nIndonesian banks also would create a new source of fresh funds to
\nstrengthen the capital base of Indonesian banks. Given the
\nfinancial crisis and the huge amount of bad debts suffered by
\nmost banks in the country, foreign banks are now almost the only
\npossible supplier of new capital to the banking industry.<\/p>\n
Even though such a temporary pause in corporate foreign debt
\nservicing was only a proposal made by Radius Prawiro, the former
\neconomics minister assigned by the government to assist corporate
\ndebtors, it would most likely be accepted by foreign creditors.
\nThe fact is, most foreign creditors have been facing a de facto
\ndebt moratorium as far as the private sector's debts are
\nconcerned.<\/p>\n
The bitter fact is that if Indonesia's foreign creditors
\ninsisted on demanding payments from its debtors here, the current
\nchaotic situation would drag on since the rupiah would remain
\nunder tremendous pressure, resulting in wild, volatile and
\nsteadily falling rates. This would mean a death penalty for the
\ndebtors and a total loss for the creditors.<\/p>\n
The debt-settlement scheme announced by Radius yesterday seems
\nto be the most reasonable way to eventually achieve a win-win
\nsituation for both debtors and creditors. The establishment of a
\nsteering committee of senior international bankers for the
\ncreditors and a contact committee for borrowers would provide an
\norderly framework under which both sides could negotiate the best
\nways of enabling the debtors to service their debts in a
\nsustainable manner. The sooner the negotiations could be
\ncompleted, the shorter the debt servicing freeze could be.<\/p>\n
It is most impressive that the scheme is strictly based on the
\ngovernment's principle of not bailing out corporate debts and
\nthat negotiations will be made on a case by case basis, the same
\nway the debtors and creditors negotiated and concluded their loan
\nagreements.<\/p>\n
Radius is also quite realistic and honest in his assessment
\nthat the framework would not guarantee the viability of every
\nIndonesian corporation, warning that those with no prospect of
\nsurvival may have to close unless new capital is injected. It is
\nindeed completely unfair to involve the taxpayers' money in the
\nsettlement of corporate debts. After all, debt is a bilateral
\nbusiness deal between the debtor and creditor and both should
\nbear the risks of their business.<\/p>\n
Creditors who throw money at risky ventures should bear the
\nconsequences if the borrower cannot pay back the debt. Borrowers
\nwho use loans recklessly should also be made responsible for
\ntheir bad business practices.<\/p>\n
The government guarantee for the claims of depositors and
\ncreditors of Indonesian banks is only a short-term measure to
\nrestore confidence in the banking system. It does not address
\nproblem banks. The guarantee, as Minister of Finance Mar'ie
\nMuhammad stated yesterday, would remain in place for at least two
\nyears. In the meantime, a deposit insurance scheme will be
\nprepared to eventually take over the government guarantee.<\/p>\n
Indonesia's problem banks will instead be handled by the
\nIndonesian Bank Restructuring Agency (IBRA) which, for the time
\nbeing, will take over part of the supervisory authority of Bank
\nIndonesia. The agency will take over problem banks and
\nrestructure them. As a last resort, the agency could liquidate
\nproblem banks and sell their assets to repay creditors and
\ndepositors. Although the agency is granted only a limited
\nlifespan, it will reduce the workload of the central bank in
\nmanaging and overseeing the rehabilitation program which includes
\nadditional prudential requirements.<\/p>\n
Judging by the new bold measures -- perhaps the boldest of all
\nreform measures announced over the past three months -- we fully
\nshare Mar'ie's optimism that \"the public can now rest assured
\nthat their bank deposits are now completely safe and sound\".<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/arresting-the-rupiahs-drop-1447893297",
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"sponsor": "Okusi Associates",
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