Arresting the rupiah's drop

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".