Controversial debt deal

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.