Debtor-creditor date

Debtor-creditor date

The two-day conference on Indonesian corporate foreign debt
that ended here on Tuesday was not designed to reach any concrete
deals but mainly to jump-start negotiations between creditors and
debtors. That seemed a fairly petty task for such a massive
gathering which brought together participants from all around the
world.

But simply by accomplishing that objective, which by and large
it did, the conference will go a long way to resolving the
complex issue of the huge debt overhang. The problem is that most
Indonesian corporate debtors have not only stopped talks, they
have ceased repaying debts from early this year when the rupiah
lost almost 80 percent of its value against the U.S. dollar and
increased their debt burden fourfold.

It was also fortunate, though, that the mood at the conference
-- which was attended by around 1,200 debtors, creditors,
lawyers, consultants, auditors and officials -- was buoyed by
better macroeconomic conditions.

The rupiah has now stabilized at a range of between 7,000 and
7,800 to the U.S. dollar, gaining almost 40 percent in value last
month alone. Inflation is on the decline, with the consumer price
index falling by 0.27 percent in October from a rise of 3.75
percent in the previous month. Exports also have been
reinvigorated.

This conducive climate, combined with the better institutional
infrastructure provided by the Frankfurt Agreement concluded last
June and expeditious legal rules under the Jakarta Initiative
launched in September, will help maintain the momentum of debtor-
creditor negotiations until concrete deals for debt restructuring
are hammered out.

Under the Frankfurt agreement, Indonesian debtors are allowed
to reschedule debt repayments over eight years, including a
three-year moratorium on principal repayments in which only
interest must be paid. They are also guaranteed access to dollars
at a pre-determined rate by the Indonesian Debt Restructuring
Agency (INDRA).

The Jakarta Initiative provides a better legal infrastructure
for the debt restructuring process through such business
restructuring deals as debt-equity swaps, new share issues,
mergers and foreign stakes in local companies.

Like bank restructuring, a solution to the US$67.7 billion
foreign debt problem (not including $12 billion owed by
Indonesian banks), is crucial to ending the economic crisis.
Without debt restructuring, foreign investors will be unlikely to
return to the country and Indonesian businesses will be left
isolated from the international financial community. Debt
rescheduling will also make it easier for the government to
assess the demand for foreign exchange, thereby minimizing the
risk of instability in the foreign exchange market.

The Coordinating Minister for Economy, Industry and Finance
Ginandjar Kartasasmita rightly argued at the opening of the
meeting that without substantial progress toward resolving the
problems facing Indonesian business, the momentum recently built
up in the economy will be lost. It is truly vital that the
corporate sector takes action to resolve the debt problem. It is
only when all corporations begin to produce, pay tax, and hire
workers that the economy will reemerge from its own ashes.

However, negotiations will be smooth and lit by mutual
understanding only when both sides meet in good faith and are
fully honest with each other. Indonesian debtors should realize
that regardless of whatever financial distress they are
suffering, they cannot simply stop repaying their debts and sit
back to wait for the turbulence to die down. By behaving that
way, they will never again be able to do business with third
parties and obtain new credit from domestic and foreign banks.

On the other hand, creditors need to fully understand that the
debt problem is not entirely of debtors' own making. They should
agree to restructure outstanding loans over a longer period and
offer debt write-offs to inject a dose of mutual good faith into
the negotiations. Resolving debt disputes through bankruptcy
proceedings, although now much easier under the new insolvency
law, would at best give creditors a Pyrrhic victory.