Dealing with debtors

The Cabinet finally moved to take a strong line against the country's largest debtors, threatening to take resolute legal action against uncooperative debtors within the next four months. This latest move automatically annuls the highly controversial decision taken by the ministerial Financial Sector Policy Committee earlier in December to extend their debt-settlement agreements by six to 10 years and to offer them more lenient payment terms.

It is too early to judge whether the government now really has the political courage to deal firmly with the biggest, and most "powerful", debtors, who still have many friends in high places. But we have good reason to be skeptical.

In fact, given the demands it has repeatedly being making since 2000 for the debtors to meet the commitments they made in their debt-settlement agreements and the earlier threats it made to take criminal proceedings against recalcitrant debtors, the noises now emanating from the government bear an uncanny resemblance to those produced by a broken record.

That the Cabinet has yet to appoint legal council to review the debt-settlement agreements involving more than Rp 140 trillion (US$14 billion) in debts owed by the former owners of those banks that were liquidated or nationalized is further evidence that the government is not yet fully confident of its legal position vis-a-vis the bad debtors.

The government made similar threats of strong legal action in November, 2000, claiming that most of the 35 largest debtors had been uncooperative and had failed to stand by the commitments they had made in their debt-settlement accords, and that several debtors had overstated the value of the assets they had pledged to the government as collateral.

The most troublesome of the debt-settlement pacts are the Master Shareholder Settlement and Acquisition Agreements (MSAA) entered into with five debtors and involving more than Rp 88.6 trillion. These were hastily drawn up in late 1998 by the then Habibie government out of fear that longer delays might prompt the debtors to engage in asset stripping.

However, the MSAAs contain a number of clauses that are greatly disadvantageous to the government. The agreements, for example, automatically discharge and acquit the debtors as against any potential civil or criminal liability regarding violations of banking laws, notably the legal lending limits.

Even more disadvantageous is the clause stipulating that any shortfalls in the proceeds of asset sales conducted for the purpose of repaying debts are the responsibility of the government, whereas any surpluses accruing from such sales automatically revert to the debtors. Strange too is the fact that the accords leave the management of the pledged assets entirely in the hands of the debtors.

And the government has since found that the value of most of the assets pledged has greatly eroded, lumbering the government with the onerous task of making up the difference. The problem, however, is to adduce sufficient legally acceptable evidence to prove that the depreciation in asset values was due to occurrences or circumstances that were within the debtors' control.

This is, we think, the last chance for the government to prove that it really has the courage to stand up to the bad debtors, otherwise it will lose whatever little credibility it still has in the eyes of the public.

The onus is now on legal council to establish evidence that is admissible in court of noncompliance on the part of the debtors. The council should be able to uncover enough evidence to prove which of the debtors entered the agreements in bad faith, and which of them were cooperative and honestly tried to meet their obligations but failed to do so due to factors beyond their control.

Only legally admissible evidence of noncompliance and bad faith will enable the government to declare the original debt- settlement accords to be null and void, bring uncooperative debtors to justice or lead to the signing of new agreements with cooperative debtors that are fair to both parties. After all, it is in the best interests of both the nation and the debtors if their bad debts can be resolved satisfactorily at the least cost.

Inadequate evidence, however, would lead to the government and the debtors becoming bogged down in protracted legal battles, which could block the scheduled sales of pledged assets with a consequent highly damaging impact on the state budget and the quality of the assets themselves.