Govt issues bonds to recapitalize banks

Govt issues bonds to recapitalize banks

JAKARTA (JP): The government issued on Friday bonds worth Rp
157.61 trillion (US$19.40 billion) to recapitalize 23 banks and
fund its obligations to the central bank.

Minister of Finance Bambang Subianto said the bond issue was
an essential step in efforts to rebuild confidence in the banking
industry and the country's economy.

"All this is expected to have a positive impact on the
restoration of the Indonesian economy," he said at a press
conference.

Bambang said the total recapitalization cost of the country's
banking sector was estimated at Rp 351.62 trillion, but the bond
issues for nine other private banks (including seven nationalized
in March) and the seven state banks totaling Rp 244.8 trillion
would be made in stages in the future.

The government issued two types of bonds worth Rp 103.83
trillion to recapitalize the 23 banks.

The first consists of floating-rate bonds worth Rp 95.15
trillion, with the interest rate linked to Bank Indonesia's 3-
month SBI promissory note rates and with a maximum maturity of 15
years from the date of issue.

"But for now, the bonds are issued in 16 series with
maturities of between 3 to 10 years," Bambang said, adding that
the interest rate would be paid on a quarterly basis.

The second consists of fixed-rate bonds worth Rp 8.68 trillion
also with a maximum maturity of 15 years.

"For now, we issue two series of fixed-rate bonds with
maturity of 5 years and 10 years, carrying a fixed coupon rate of
12 percent and 14 percent respectively, and paid every six
months," Bambang said.

The bonds were injected as government equity participation in
the recapitalization of the 23 banks, aimed at boosting their
capital adequacy ratios (CAR) to a minimum 4 percent level for
the 11 private banks, and 8 percent for the 12 provincial
development banks. The banks will receive fresh cash derived from
the bond coupons.

CAR is the ratio between capital and risk-weighted assets.

Most Indonesian major banks have been technically bankrupt,
with negative capital, due to huge bad loans and negative
interest rate spreads.

The other bonds are index-linked bonds worth Rp 53.78
trillion, with an interest rate of 3 percentage points above the
inflation level, and with a maximum maturity of 20 years. The
interest is payable every six months.

The index-linked bonds were issued to repay Bank Indonesia
loans, provided under the government deposit guarantee scheme, to
depositors and creditors of the 48 banks closed in 1998 and 1999.

Bambang said the government planned to allow a secondary
market for the bonds but will have to wait until January 2000
because of concerns over the so-called Y2K computer problem.

Bambang said the floating-rate bonds would be used to boost
the banks' CAR levels from the negative territory to the zero
level, while the fixed-rate bonds would be used to lift the CAR
level from zero to the minimum (4 percent) requirement level.

The 11 private banks are the publicly listed Bank
Internasional Indonesia (BII), Bank Lippo, Bank Universal, Bank
Danamon, Bank Tiara and Bank PDFCI, and non-listed Bank Central
Asia (BCA), Bank Bukopin, Bank Prima Express, Bank Artha Media,
and Bank Patriot.

Publicly listed Bank Bali was also expected to be
recapitalized on Friday, but Bambang said the bond issue for the
bank was delayed pending the due diligence study conducted by
Standard Chartered Bank, which has injected $56 million for a 20
percent interest in the bank.

Bambang added that the bond issue for publicly listed Bank
Niaga was waiting for the result of negotiations with potential
foreign investors.

The government nationalized Bank Danamon, Bank Tiara, Bank
PDFCI and Bank BCA in August 1998, making the government
responsible for their recapitalization at a cost of Rp 80.47
trillion.

In the case of the other seven banks, the government initially
planned to only finance up to 80 percent of the recapitalization
costs, while the remaining 20 percent was expected to come from
the bank owners.

But as recapitalization costs soared due to persisting
negative spread problems -- meaning the bank pays higher interest
rates on time deposits than it earns from lending rates -- bank
owners were unable to provide the compulsory 20 percent cash
requirement.

The recapitalization costs of the seven banks plus Bank Bali
totaled Rp 24.5 trillion, up from an earlier estimate of more
than Rp 14 trillion.

Bank Indonesia deputy governor Subarjo Joyosumarto said
earlier on Wednesday that the government had also to finance the
bulk of the additional recapitalization costs of the larger
banks.

He pointed out that the government injected 90 percent of the
recapitalization funding of BII, Bank Lippo, and Bank Universal,
and 83 percent of the funding for Bank Bali.

Bambang said the government had to pay the extra cost because
it had been decided early on that bank recapitalization was
crucial for restoring the banking sector and the economy to a
sound footing.

"We have decided from the outset to be firm on this
recapitalization measure," he said to quell criticisms of the
higher-than-estimated recapitalization cost. (rei)