Analysts say rupiah repayments the last step

Analysts say rupiah repayments the last step

LONDON (Reuters): Indonesian banks have been repaying
distressed hard currency debt in rupiah for more than a week, a
worrying development that could bring the country's financial
crisis to a head, London analysts said.

The repayment of dollar-denominated loans in rupiah at current
rates has only added to selling pressure on the Indonesian unit
and is aggravating the crisis, they said.

Either Jakarta decides to guarantee a selected amount of the
outstanding debts or the failure of the currency to recover will
force the country to call a unilateral halt to repayments and a
nationwide debt moratorium.

"It looks more and more like they will have to opt for the
Chilean solution from the 1980s and allow the central bank to
provide dollar liquidity to a number of key corporates and let
the rest sink or swim," said one analyst at a European bank in
London.

Bankers in London, who declined to be quoted because of the
sensitivity of repayment negotiations, confirmed reports from
Singapore on Tuesday that repayments in rupiah have been seen for
at least a week and in increasingly significant amounts.

Companies unable to find scarce dollars on the local market
are asking Indonesian banks to accept foreign currency loan
repayments in rupiah rather than dollars. The banks are then
negotiating similar deals with western bank creditors.

"Many creditors are beginning to think it is better to accept
dollar debts in rupiah rather than run the risk of not getting
paid at all," said one analyst at a European bank.

"The rupiah is then being immediately hedged though the
foreign exchange market and it is exaggerating the rupiah's
weakness -- and ultimately the whole situation."

Indonesia's huge private-sector foreign currency liabilities
have spiraled as a result of the rupiah's 75 percent collapse
against the dollar since July of last year.

This has brought their ability to repay into question and the
consequent scramble for dollars to cover these loans has, in
turn, exaggerated the rupiah's slide. A vicious circle has
ensued, dealers said.

Indonesian President Soeharto's statement last week that the
government would not bail out troubled companies sent shivers
through western creditors and has prompted some to accept rupiah
for the loans for fear of large-scale bankruptcies.