Government gearing up for London Club meeting

Dadan Wijaksana, The Jakarta Post, Jakarta

After securing a US$5.4 billion debt rescheduling facility from the Paris Club of creditor nations last week, the government is now gearing up to seek comparable treatment from the London Club of private creditors.

The London Club talks will discuss the rescheduling of the country's debt to overseas private lenders, which is due to mature between April of this year and December 2003.

Minister of Finance Boediono confirmed the plan, saying Indonesia would seek to reschedule some $340 million worth of standby loans.

"What we're going to ask for is a rescheduling of our standby loans to international syndicated banks," Boediono told reporters on Monday, adding that there was no exact timetable as yet pending further deliberation.

He said, however, that the debts to be rescheduled did not include more than $300 million worth of Yankee bonds maturing during the period.

A Yankee bond is a U.S. dollar-denominated bond sold by a foreign company or country.

London Club debt rescheduling is a condition requested by the Paris Club.

But forcing private creditors to share the burden of the sovereign debt rescheduling would lead to a downgrading of Indonesia's sovereign rating.

"Unfortunately, we'll most probably have to downgrade Indonesia's sovereign rating to selective default because of the comparability application on the debt from the private sector," Standard & Poor's director of sovereign ratings for the Asia Pacific region, Takahira Ogawa, was quoted by Reuters as saying on Monday.

A downgrade may raise borrowing costs for Indonesia if it makes investors more wary of investing here.

But it may only be a temporary setback and the stigma of "selective default" may have been diluted given several countries' experiences in recent years.

S&P may quickly revise up an issuer when the new terms and conditions are agreed. Pakistan was downgraded to selective default after a 1999 restructuring of its debt but it was subsequently upgraded as the revised terms and conditions were seen as improving its capability to pay, Reuters said.

The Paris Club rescheduling facility is crucial to helping hold the country's state budget deficit at a safe level.

The successful bid last week leaves the government to shoulder a maximum of "only" $2.7 billion in its debt service obligations for this year.

However, the International NGO Forum on Indonesian Development (INFID) sees the scheme differently, claiming that it will not contribute to a comprehensive, sustainable and long-lasting solution to the country's US$131 billion public debt burden, the equivalent to its annual gross domestic product.

INFID said in a statement that the deal secured by the government focused solely on the country's cash flow problems and was aimed only at covering the budget deficit.

The agreement would consequently not create any room for maneuver as far as development and social spending was concerned. According to INFID, a debt write-off scheme was therefore what the country really needed at the moment.

INFID called upon all creditors of Indonesia to leave behind the unfair mechanism of the Paris Club -- where creditors and debtors could not meet on an equal footing.

Boediono, when asked to comment on a possible debt write-off, said that that kind of treatment would be risky today as it would need certain mechanisms that were acknowledged by the international community.

"There are no such mechanisms at present. What's available for us is debt rescheduling schemes, like the Paris Club deal.

"But if there were to be in the future ... then, of course, we would attempt to seize the opportunity."