Govt guarantee on L/Cs extended

JAKARTA (JP): Bank Indonesia deputy governor Dono Iskandar Djojosubroto said on Wednesday that the government guarantee on letters of credit (L/Cs) issued by local banks had been extended through December 2000.

Dono said L/Cs maturing in June 2001 would still be guaranteed by the government via the central bank.

"Our economy has not yet fully recovered, so foreign banks still ask for guarantees. And our credit rating is still at a low point," he told a routine news conference.

Dono explained that a guarantee was needed so that foreign banks would honor the L/Cs issued by local banks for the country's importers, many of which were also exporters importing raw materials.

"With a government guarantee, foreign banks will not be afraid of local banks defaulting," he said, but added that until now there had been no defaults except by banks closed down by the government.

Foreign banks had refused to accept L/Cs issued by local banks after several banks had difficulties repaying L/Cs upon maturity in the wake of the sharp plunge of the rupiah in 1998.

The government then held talks with hundreds of foreign banks in Frankfurt, Germany, in July 1998 to negotiate the reopening of the badly needed credit line to local banks.

The banks, represented by a 12-member steering committee, then agreed to reopen the credit line under the condition that the central bank guaranteed the local L/Cs.

The agreement is part of the Frankfurt Agreement.

But the guarantee scheme had to be revised after the Bank Indonesia became independent in 1999 after which it could no longer provide credit to the government.

Dono said that under the new guarantee scheme, it was the government that would guarantee L/Cs via the central bank.

He pointed out that the government made a US$50 million deposit at Bank Indonesia to allow the central bank to use the funds in case local banks defaulted on L/Cs.

He said that the government would increase the amount of the deposit if deemed necessary.

Meanwhile, another Bank Indonesia senior official, Veronica Sulistyo, said the government had also imposed a penalty system for local banks failing to honor their L/C obligations on time.

Veronica said that if a bank defaulted, it would have to repay the amount plus interest to the central bank within three months. The interest rate would be 1.25 times the interest rate of Bank Indonesia three-month SBI promissory notes.

If a bank fails to make the repayment within the three months, the interest rate would be increased to three times the interest rate of three-month SBIs.

"If a bank still fails to make the repayment, Bank Indonesia will withdraw its foreign exchange license," Veronica said.

She said that without the guarantee scheme, local banks would have to pay a very high confirmation fee of between 8 percent and 9 percent to foreign banks.

She said that with the guarantee scheme, the confirmation fee could drop to less than 1 percent.

She said the confirmation fee during normal periods was less than 0.25 percent.

Veronica also said that local L/Cs confirmed by foreign banks as of March 2000 totaled $2.4 billion.(rei)