Arresting the rupiah's drop
The new bold measures on corporate debts and bank restructuring announced by the Indonesian government yesterday directly address the main causes of the wild volatility and downward spiral of the rupiah's exchange rate.
A temporary freeze on the servicing of both the interest and principal of corporate debts, called for in the measures, would soon arrest the strong demand for American dollars. The government guarantee to pay rupiah and foreign currency claims to depositors and creditors of all Indonesian incorporated banks would restore public confidence in the banking system and reopen foreign credit lines to foreign exchange banks in the country.
The removal of all restrictions of foreign ownership of Indonesian banks also would create a new source of fresh funds to strengthen the capital base of Indonesian banks. Given the financial crisis and the huge amount of bad debts suffered by most banks in the country, foreign banks are now almost the only possible supplier of new capital to the banking industry.
Even though such a temporary pause in corporate foreign debt servicing was only a proposal made by Radius Prawiro, the former economics minister assigned by the government to assist corporate debtors, it would most likely be accepted by foreign creditors. The fact is, most foreign creditors have been facing a de facto debt moratorium as far as the private sector's debts are concerned.
The bitter fact is that if Indonesia's foreign creditors insisted on demanding payments from its debtors here, the current chaotic situation would drag on since the rupiah would remain under tremendous pressure, resulting in wild, volatile and steadily falling rates. This would mean a death penalty for the debtors and a total loss for the creditors.
The debt-settlement scheme announced by Radius yesterday seems to be the most reasonable way to eventually achieve a win-win situation for both debtors and creditors. The establishment of a steering committee of senior international bankers for the creditors and a contact committee for borrowers would provide an orderly framework under which both sides could negotiate the best ways of enabling the debtors to service their debts in a sustainable manner. The sooner the negotiations could be completed, the shorter the debt servicing freeze could be.
It is most impressive that the scheme is strictly based on the government's principle of not bailing out corporate debts and that negotiations will be made on a case by case basis, the same way the debtors and creditors negotiated and concluded their loan agreements.
Radius is also quite realistic and honest in his assessment that the framework would not guarantee the viability of every Indonesian corporation, warning that those with no prospect of survival may have to close unless new capital is injected. It is indeed completely unfair to involve the taxpayers' money in the settlement of corporate debts. After all, debt is a bilateral business deal between the debtor and creditor and both should bear the risks of their business.
Creditors who throw money at risky ventures should bear the consequences if the borrower cannot pay back the debt. Borrowers who use loans recklessly should also be made responsible for their bad business practices.
The government guarantee for the claims of depositors and creditors of Indonesian banks is only a short-term measure to restore confidence in the banking system. It does not address problem banks. The guarantee, as Minister of Finance Mar'ie Muhammad stated yesterday, would remain in place for at least two years. In the meantime, a deposit insurance scheme will be prepared to eventually take over the government guarantee.
Indonesia's problem banks will instead be handled by the Indonesian Bank Restructuring Agency (IBRA) which, for the time being, will take over part of the supervisory authority of Bank Indonesia. The agency will take over problem banks and restructure them. As a last resort, the agency could liquidate problem banks and sell their assets to repay creditors and depositors. Although the agency is granted only a limited lifespan, it will reduce the workload of the central bank in managing and overseeing the rehabilitation program which includes additional prudential requirements.
Judging by the new bold measures -- perhaps the boldest of all reform measures announced over the past three months -- we fully share Mar'ie's optimism that "the public can now rest assured that their bank deposits are now completely safe and sound".