Easing the choking debt

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.