Tue, 15 Jan 2002

Controversial debt deal

The agreement the government and a number of conglomerates made in late 1998 to recoup more than Rp 138 trillion (US$13 billion) in emergency loans given by Bank Indonesia to several major banks has been as controversial as the extension of liquidity support itself.

The deals, popularly known as the Master Settlement and Acquisition Agreements (MSAA) and Master of Refinancing Agreements (MRA), were hurriedly negotiated amid the peak of the economic crisis in mid-1998 in a desperate bid to recover the multi-billion dollar loans for the cash-starved government.

Greatly concerned that longer delays would allow the huge debtors to strip their assets and transfer their money overseas, then president B.J. Habibie insisted that the former owners of the banks that received liquidity credit repay their debts in cash within one year. Foreign consultants were then hired to value the assets (companies) to be ceded by the debtors to settle their obligations.

However, the International Monetary Fund (IMF) balked at Habibie's request, arguing that a quick sale of more than 150 companies to be surrendered by the conglomerates under the then depressed economic situation would not only result in a fire sale at very cheap prices but would also cause disruptions in the management of the companies with damaging impacts on the economy.

Most other independent analysts also shared the IMF view, especially because Habibie was then surrounded by close advisers with strong nationalist sentiments, who demanded that the debt settlement be used as a mechanism to redistribute economic assets from ethnic-Chinese conglomerates to cooperatives and other indigenous business people.

Senior economist Frans Seda, who was then an adviser to Habibie, was against the massive dumping of assets on the market, saying that the government might be able to recoup only a tiny fraction of the emergency loans and that such a measure might also give the impression to the international community that the government nationalized assets from investors.

The government finally agreed in November 1998 to conclude the four-year MSAAs and MRAs with the big debtors, including Soedono Salim of Bank Central Asia, Mohammad Bob Hasan of Bank Umum Nasional, Sjamsul Nursalim of Bank Dagang Nasional Indonesia, Usman Admadjaja of Bank Danamon and Sudwikatmono of Bank Surya.

Under the agreements, the debtors settled their debts by ceding more than 150 companies to the Indonesian Bank Restructuring Agency (IBRA), which were then valued by consultants and auditors as equivalent to their debts. The debtors were in turn absolved of any further obligations and of potential civil or criminal proceedings regarding the violations of banking laws, notably the breaches of the maximum legal lending limits to connected parties.

Problems and controversy later exploded as the value of the ceded assets turned out to be much smaller than their original valuation, and quite a portion of the emergency loans pumped by the central bank during the height of the banking crisis in early 1998 had been misused for currency speculation and paying subsidiaries. IBRA has estimated that the highest recovery rate is likely to be a mere 30 percent, meaning that 70 percent of the Rp 138 trillion loans could be lost. The Financial Sector Policy Committee of senior economic ministers set off another bomb early this year by disclosing that the government would agree to extend the agreements to 10 years for cooperative debtors.

Certainly, not all the debtors can automatically be held entirely responsible for the fiasco. They had ceded assets whose value was assessed by independent auditors hired by the government. The auditors or consultants cannot either be blamed wholly for the worsening of the assets. If the value of the assets are now much lower than the original estimate then that was largely caused by the government's failure to improve the political and economic situation and legal certainty. How could the asset value remain stable, let alone increase, when the economic outlook remains so bleak and their management and supervision under IBRA has been so poor.

The government is faced with a delicate dilemma. It cannot simply declare the MSAAs and MRAs void, as both parties are legally bound by the agreements. But simply extending the agreements to 10 years, as the government has planned to do, is completely unjust to the people who now bear the burdens of the loans. Superficial rescheduling will accomplish nothing.

The government should first classify the debtors into those who entered the 1998 agreements in good faith and the ones in bad faith, who ceded assets with legal flaws. Then they should renegotiate the deals with good debtors under new agreements, not only rescheduling, but also restructuring, their debts. This requires the reevaluation of ceded assets and the restructuring of their management and operations. But the debtors of bad faith, who were proven to have cheated the government with legally flawed assets, should be brought to justice, immediately.