Easing the choking debt

The government has started to sell to corporate debtors the overall foreign debt restructuring package under the June 4 Frankfurt agreement which will become effective early next month. Restructuring the private-sector debt overhang, estimated at about US$72 billion, including $8 billion owed by banks, is one of the four top-priority policy agendas that have to be implemented immediately to lead the nation out of its economic crisis.

In fact, the huge debts, of which $32 billion are due this year, have been one of the major factors that triggered the steep fall in the rupiah's exchange rate since late last year when companies and banks, concerned about the contagion impact of the monetary crisis in Thailand, scrambled for dollars to repay debts and foreign fund managers terminated their deals and rushed out of the country.

As the rupiah fell to as low as 8,000 to the dollar in early January from 2,400 last July, almost all debtors stopped payments. This turned the currency fiasco into a full-blown economic crisis, with the rupiah losing more than 80 percent of its value as foreign banks stopped all credit lines, including trade financing, to Indonesia. Most industrial firms which depend largely on imported materials were forced to either stop operations or slash production.

It is quite clear, therefore, that the debt restructuring package under which corporate debt will be rescheduled to eight years, including three years of grace period, and bank debts to four years, will have the immediate effect of cooling off the demand for dollars and eventually stabilizing the rupiah rate.

The Indonesian Debt Restructuring Agency (INDRA) which runs the restructuring package for corporate debts -- bank debts settled under a different modality under the Frankfurt pact -- will guarantee the availability of foreign currency to debtors. They in turn are obliged to pay in rupiah the interest charges and debt installments to INDRA, at a predetermined but adjustable exchange rate, for the eight-year maturity period.

The tricky part is that debt settlement under INDRA is voluntary in nature, based on bilateral agreement between debtors and creditors. The government cannot force borrowers and creditors to join the Frankfurt debt restructuring pact.

But there are no better options for cash-strapped Indonesian debtors, many of which are already technically bankrupt, except for a small number who do robust export business. The package should be the most viable one as it will give the embattled debtors breathing space to repay debts in rupiah within a longer period of time.

Debtors can no longer simply stop paying as they have done since January. Stubbornly resisting payment will bring debtors to liquidation through the Commercial Court, which will start operations next month under a new, better structured bankruptcy law enacted by the House of Representatives yesterday.

Foreign creditors do not have much better alternatives for recouping their loans. Dud loans generate no income at all and settlement under the bankruptcy law, besides being messy and destroying long-time business relationships, usually recoups only a small portion of the total value of loans.

Theoretically, barring any social and political instability, if most debtors and creditors join the INDRA-administered package, the pressures for the rupiah will significantly decrease and the currency will eventually stabilize because only the interest charges will have to be paid within the next three years. Down the road, a stable rupiah at a reasonable rate will remove most of the economic woes that have virtually been paralyzing business operations, thus improving corporate ability to generate earnings.

But this benefit will not take place if debtors and creditors do not agree on the terms of the package, and crucial to such an agreement seems to be a concession on the part of creditors. Creditors should be willing to bear part of the losses suffered by their borrowers as a result of the rupiah collapse by writing off a portion of their loans. This is part of the risk the creditors must bear as a result of their "lending spree" to Indonesia in the early 1990s. Without some write-off, we are afraid many Indonesian debtors who are in a desperate situation may resort to the messy procedures of bankruptcy at the expense of both parties.