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.