Germany's appeals against CBS plan

Germany's appeals against CBS plan

JAKARTA (JP): German Finance Minister Theo Waigel has said he
fully understands Indonesia's objectives in introducing a
currency board system (CBS) to stabilize its currency, but that
such a system is not viable at this point in time.

Waigel said yesterday a CBS, which would peg the rupiah to a
fixed exchange rate with a foreign currency, was only good in the
long term as the country did not currently fulfill the necessary
requirements for such a scheme.

"There is no alternative to IMF reforms," he told the media
after a meeting with President Soeharto and economics ministers.

"It is better for Indonesia to proceed with the reform
programs agreed to with the IMF... there is no alternative to
the IMF reform programs," Waigel said.

He cited huge foreign reserves, a sound banking industry,
abolition of monopolies and adequate legislative infrastructure
as some of the basic requirements for CBS operations.

The German finance minister arrived here yesterday as part of
a tour that included South Korea and Thailand. He met immediately
with Soeharto and Finance Minister Mar'ie Muhammad separately.

Waigel said Soeharto listened attentively to his views which
also represented those of other members of the Group of Seven
industrialized countries.

He added that German companies in Indonesia also were
nervously waiting for firm implementation of the International
Monetary Fund (IMF)-sponsored reform package.

In a related development, President Bill Clinton is defending
the IMF rescue program for stabilizing and restoring Indonesia's
economy to a sound, robust growth path.

"I think I'm making it quite clear that the president stressed
to President Soeharto the importance of making a sustained effort
that would lend credibility to the work the IMF is doing in the
country," White House spokesman Mike McCurry was quoted by
Reuters as saying in Washington.

President Clinton spoke to Soeharto Friday night by telephone
to add his voice to a chorus of IMF and other international
opposition to a Hong-Kong style currency board for the rupiah,
fearing it would send Indonesia's economy into a tailspin.

"The president did discuss the currency board, among other
topics," McCurry said. "There are a lot of complexities and
technical issues that have to be addressed before we think a
currency board would be feasible."

Treasury Secretary Robert Rubin on Tuesday also urged
Indonesia to remain faithful to IMF reforms in order to win back
investor confidence in its financial future.

In comments to reporters following a speech in Washington,
Rubin said: "I think what you need in Indonesia is... a
sustained implementation of a (IMF) reform program, sustained
over a sufficient period of time and with enough evidence of
commitment so that international financial markets have enough
confidence in the institutionalization of that regime."

IMF managing director Michel Camdessus has already warned that
its 43-billion-dollar rescue package for Indonesia could be
jeopardized if Soeharto persists with plans to create the
currency board.

Rubin said the abolition of monopolies controlled by
politicians, an end to subsidies on basic commodities and a
financial sector overhaul was the best way to restore confidence
in the economy and the currency.

In Tokyo, a delegation of Japan's ruling Liberal Democratic
Party which just returned from a visit to Asia said in a report
yesterday that the establishment of a currency board for the
rupiah would not be appropriate at the moment.

The report said the delegation met Foreign Minister Ali Alatas
and exchanged views on the possible establishment of a currency
board system in Indonesia.

"We pointed out that the currency board system would not be
appropriate for Indonesia at the moment," the report said.

It added that the delegation told Alatas that Indonesia should
consult fully with the IMF and other nations, such as the United
States and Japan, before implementing the system.

In New York, U.S. credit rating agency Moody's Investors
Service said on Tuesday that a CBS would not address Indonesia's
underlying problems.

Jakarta will need to deal with a massive stockpile of
corporate debt, a deeply troubled banking system and shattered
confidence in the country's finances, which would not be cured by
the implementation of a currency board, Moody's analysts told
investors in a teleconference.

"It doesn't address the underlying problem that Indonesia
faces," said Vincent Truglia, managing director at Moody's. "This
is why you're seeing so many critics of an Indonesian currency
board at this time under these circumstances."

The establishment of a CBS would not change the fundamental
factors behind the severe loss of confidence in Indonesia's
financial markets, Moody's said.

"Without these underlying factors being addressed, the
currency board system would do little to prevent further capital
outflow, thereby causing a period of very high interest rates and
further problems with the banking system," said Steven Hess,
senior analyst at Moody's.

The operation of a CBS would also appear to be incompatible
with Indonesian government guarantees to support bank deposits,
Hess said. (rid)