Clinton consults with Soeharto about bailout

Mon, 16 Feb 1998 | Source: REUTERS

WASHINGTON (Reuters): President Bill Clinton spoke with Indonesian President Soeharto for about 30 minutes by telephone on Friday night, a White House official said on Saturday, amid reports a bailout for Indonesia faced potential cutoff because of a disagreement about economic policy.

Clinton telephoned Soeharto "to go over the current situation with respect to Indonesia," the White House official said without providing any details about the substance of their conversation.

But a report on Saturday in The Washington Post said the head of the International Monetary Fund had warned in a letter of cut off in bailout funds for Indonesia because of dispute about how to revive its battered economy.

IMF Managing Director Michel Camdessus' warning was contained in a letter to Soeharto, specifically criticizing the possibility that the government was considering radically changing the country's monetary system to fix the rupiah's value against the U.S. dollar, the Post said.

But an IMF official in Washington had no comment on the Post story and declined to provide a copy of the letter.

Meanwhile, Indonesian House Speaker Harmoko said in Pandeglang, West Java, yesterday that all factions in the House fully supported the government plan on CBS.

"I have talked to all the four factions at the House and all come out in support of CBS as they are confident the system will stabilize the rupiah rate and restore certainty for economic and business activities," Harmoko was quoted by Antara as saying.

The Washington Post said it had obtained a copy of Camdessus' letter in which the IMF chief warned he would recommend the 182- nation organization suspend a rescue effort worth more than $40 billion intended to help Indonesia regain economic stability.

"In the present circumstances... if a currency board proposal were adopted, we would not be able to recommend to the IMF Board the continuation of the current program because of the risks to the Indonesian economy," the Post quoted Camdessus.

"This would be a very unfortunate development, as it would shrink even further the reserve basis for the currency board and further undermine its very slim chance of success," Camdessus was quoted as saying.

The IMF is scheduled to disburse $3 billion to Indonesia in the middle of next month, after a review of its compliance with terms agreed for the international rescue effort.

Indonesia, Thailand and South Korea each are receiving multibillion-dollar international bailouts under the auspices of the IMF.

As the Indonesian rupiah has plummeted in value, signs have increased that Soeharto favored moving to a Hong Kong-style currency board to fix the rupiah's value against the dollar as advocated by U.S. professor Steve Hanke, recently appointed a special adviser to an Indonesian economic policy committee,

Little enthusiasm has been expressed for such a proposal by key IMF member countries, with both the United States and Germany saying they felt it was premature for Indonesia.

But none has warned so bluntly as Camdessus that Indonesia faced a potential cutoff of funds if it went ahead with a currency board.

Australia

In Canberra, Australian Treasurer Peter Costello said yesterday the best way for Indonesia to stabilize the rupiah was through the International Monetary Fund program rather than through a currency board.

"If they follow that (IMF) program, and if they adhere to that program, that is their best opportunity to stabilize their currency," Costello told Channel Nine television when asked about the currency board proposal.

Australia has pledged US$1 billion to the IMF package for Indonesia when it was put together last year, and Costello reiterated the government's position that the funds were conditional on compliance with the IMF program.

"I think that in Indonesia it's the IMF program which is going to give international confidence, and I believe that the Indonesian authorities should be following that program and not departing from it," he said.

That included cleaning up the banking system, running a good budgetary policy and ensuring Indonesia had the currency policy discussed with the IMF, Costello said.

"If they depart from that program, and this is all about confidence, a lot of people in the international community will take a second look," he said.

Costello said the financial instability was spilling over into social instability, and it was important to get the economy back on track to prevent further unrest.

"There are obvious problems in Indonesia and it will take now a great deal of political improvement to deal with that, but the basis of it will also be improving the economy," he said.