Govt seen printing more money to recapitalize banks

SEMARANG (JP): Economist Sri Mulyani Indrawati predicted Saturday that the government would have no other choice but to print more money to recapitalize ailing banks.

The University of Indonesia lecturer said the government's decision to help recapitalize banks with capital adequacy ratios of between minus 25 percent and plus 4 percent would only be possible through deficit financing by printing money.

"Because this restructuring of the banking sector has become the government's responsibility, the government has no other choice but to print more money," Sri told a seminar at the state- run Diponegoro University here.

Such deficit financing through printing money was never tolerated by the New Order administration of former President Soeharto, she said.

"We want such discipline to be maintained because the more Bank Indonesia prints money to help sick banks, the more the claims on the government will be. That will burden the government's budget," she said.

Late last month the government announced that it would provide up to 80 percent of the required funds for the bank recapitalization program.

This will add to the current Rp 141 trillion (US$13 billion) of fresh funds which has been pumped out by Bank Indonesia to troubled banks as part of the government's blanket guarantee to local banks' depositors and creditors.

Those funds theoretically should have become the government's obligations to the central bank, but the obligations were transferred to the Indonesian Bank Restructuring Agency (IBRA), an agency the government set up early this year to salvage the country's ailing banking sector.

Sri said the new printed money handed out to troubled banks to help them recapitalize would make it more difficult for IBRA to collect the money from the indebted banks.

She considered as insufficient the one year the government gave IBRA to recover the Rp 141 trillion from troubled banks because it would be difficult for IBRA to cash assets committed by their former owners.

"These huge funds which have been pumped out to help ailing banks will create great changes in the country's economy within the next three years," she said.

These excessive idle funds in the market would cause inflation to soar, she said.

Consequently, she predicted the government would maintain its high interest rate policy for some time to prevent inflation from soaring further.

And this high rate policy would further destroy domestic economy, she said. (rid)