Expert suggests commercial debt haircut for Indonesia

JAKARTA (JP): Despite constant refusal by foreign creditors, a reduction of Indonesia's huge debts is still possible if structured in commercial terms, according to an economist.

A senior economist at the Institute for the Development of Economics and Finance (INDEF), Dradjad Wibowo, said on Friday that Indonesia should consider asking for a "commercial debt haircut".

"A commercial debt haircut may gain the creditors' approval," Dradjad said in a discussion between reporters and organizations opposed to foreign debt.

Dradjad referred to South American countries which sought a debt haircut from major donor countries in the late eighties.

He said that Argentina, Brazil and Mexico had been offered a commercial debt haircut under the "Brady Plan".

Under the plan "U.S. creditors could write off the debts in exchange for government bonds, called Brady bonds", he said.

He added that in Mexico creditors had three options for converting their loans into Brady bonds.

The first option allowed creditors to convert their loans into normal bonds at 65 percent of the loans' book value.

The second option allowed creditors to convert their entire loans into Brady bonds with low interest rates.

Under the third option, creditors maintained the loan value, but provided news loans valued at 25 percent of the original ones.

Dradjad said that the Brady Plan enabled Mexico to convert US$29.4 billion of its debts into Brady bonds, and saved the country $3.4 billion in debt payments each year.

He added that, in the period between the plan's introduction in 1989 until 1993, Argentina, Brazil and Mexico had converted $103.9 billion of debt into Brady bonds.

Indonesia's own foreign debt stands at a walloping $139.14 billion as of April this year, according to Bank Indonesia data.

Of that amount, $72.19 billion is sovereign debt and $66.94 billion is private debt.

Critics have said that Indonesia's huge debts are crippling the state budget, pinning the government's dependence on donor countries.

Evidence of corruption pervading the loan system has also prompted non-governmental organizations to call for a haircut on what they call "criminal debts".

However, Indonesia has resisted to heed such calls, reasoning that it could spark cross defaults among other creditor nations.

Government officials have said the mere suggestion of a debt haircut could spoil debt restructuring talks with creditors.

But Dradjad said creditors should understand that denying Indonesia a debt haircut raises the risk of the country defaulting.

He said foreign banks with exposure here would need to raise their default reserves to match Indonesia's higher risk.(bkm)