RI plan won't work, 'agreement needed'<\/p>\n
LONDON (Reuters): Indonesia's strategy to solve its private-
\nsector debt crisis will not work in its current form, a senior
\nWestern banker said on Wednesday after meeting with a government
\ndebt negotiator.<\/p>\n
David Folkerts-Landau, global head of emerging markets
\nresearch at Deutsche Morgan Grenfell, said the country needed an
\nimmediate agreement with foreign creditors and the International
\nMonetary Fund (IMF) on a write-down of foreign currency debts.<\/p>\n
Folkerts-Landau, a former senior IMF official before joining
\nDMG in October, said a large part of Indonesia's corporate sector
\nwas technically insolvent, and this week many foreign obligations
\nhad gone unserviced.<\/p>\n
Moreover some Indonesian banks had ceased to honor foreign
\nexchange forward obligations, he said.<\/p>\n
One solution would be offering creditors a partial government
\nguarantee of the debt, backed by advanced disbursements of IMF
\nfunds in exchange for a writedown, he said.<\/p>\n
\"My judgment is that effort (the government's current
\nstrategy) is just not enough,\" Folkerts-Landau told a conference
\ncall to clients on Wednesday from Kuala Lumpur during a tour of
\nthe region.<\/p>\n
His comments came after meeting former Indonesian minister
\nRadius Prawiro, recently appointed by President Soeharto to
\nnegotiate with offshore banks.<\/p>\n
\"I would envision the eventual outcome will involve some form
\nof exchange controls and\/or rescheduling of external debt at a
\nsignificant discount to book value.\"<\/p>\n
He strongly urged the central bank to assume a lead. \"It has
\nthe authority, it has the resources.\"<\/p>\n
The DMG managing director said there was a \"creeping nature of
\nmissing repayments, having discussions and pushing along\".
\nWith interest rates above 50 percent, many firms are falling into
\narrears on rupiah debt too, he said.<\/p>\n
Even some institutions which were capable of servicing
\nobligations were choosing not to do so, preferring instead to
\npreserve their liquidity, he added.<\/p>\n
\"In a nutshell this economy is suffering from a pervasive
\ndomestic and foreign bad debt problem and in the end this will
\nrequire the writing down of the real values of the loans in both
\ncurrencies.\"<\/p>\n
Folkerts-Landau said that at an exchange rate of about 8,000
\nto the dollar the corporate sector does not have enough rupiah to
\nbuy foreign exchange needed to service external debt. It traded
\nat a record low 12,000 on Wednesday.<\/p>\n
Of a sample of 200 banks examined by DMG, about 40 percent of
\nthe aggregate loan book was non-performing at the end of last
\nyear under U.S. accounting standards and this was at an exchange
\nrate of about 5,000.<\/p>\n
\"This is much more of a solvency rather than a liquidity
\nproblem,\" he said.<\/p>\n
\"There simply is no room here for a Korea type of solution.
\nThere are far too many debtors (in) the corporate sector and the
\nbanking sector, with a diverse number of borrowing instruments
\nranging from Eurobonds to short-term commercial paper.\"<\/p>\n
In the absence of speedy negotiations between the government,
\noverseas creditors and the IMF on the write-down of the debt, the
\ncurrency was expected to come under more pressure.<\/p>\n
\"We expect that over the next few weeks the Bank of Indonesia
\nwill be forced to inject further emergency funds into the banks,
\ncontinuing to add to the accelerating inflation and thereby
\nfurther destabilizing the currency.\"<\/p>\n
DMG estimates inflation is now in excess of 60 percent on an
\nannualized basis, threatening the country's social fabric.<\/p>",
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"sponsor": "Okusi Associates",
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