How does the Jakarta Initiative measure up?

By Eddy Soeparno

JAKARTA (JP): The Jakarta Initiative successfully arranged a conference to introduce the scope and objectives of this informal body, which was created to assist borrowers and lenders in overcoming the hurdles to successful debt restructuring. Much to the organizers surprise, around 1,400 participants from various professions and countries attended the conference, anxious to discover new ways to speed up the much delayed debt talks.

However, most of the participants, especially the bankers and other financial institution members, left the conference empty handed. Well, not quite empty handed if you consider the packs of new business cards and bundles of brochures from the conference. Unfortunately, none of the participants managed to agree on a magic formula to bring current negotiations to a decisive level.

It is no secret that ever since the Indonesian government started to address the foreign debt issue seriously in late 1997, not much has actually been accomplished. Although rounds of intense discussions with creditor representatives were held around the globe, no major breakthroughs were achieved, resulting in the abandonment of coordinated and centralized efforts at debt negotiation.

Borrowers and lenders are still arguing over how to settle the unresolved debt overhang. Therefore it comes as no surprise that an increasing number of negotiations have reached a deadlock. On the other hand, several creditors have decided to take the bankruptcy route, as difficult negotiations turned impossible and hard-to-deal-with borrowers became hard-to-locate borrowers.

With the growing number of bankruptcy cases being filed in the Jakarta Commercial Court, comes an increasing number of negative comments, and to a certain extent public discontent, about creditor's intentions to send their already bleeding borrowers directly to the grave.

Creditors have suddenly become objects of criticism from the government, the private sector, the legal profession and various other walks of life. Bankers are suddenly being accused of being opportunists, taking advantage of the crisis by bankrupting their borrowers, not only to recover debts, but also to snatch up quality assets cheaply.

This perception is all but true. It is every bank's intention to keep their borrowers sound and profitable and, during noncrisis times, to generate as much mutually beneficial business as possible. By bankrupting and liquidating their borrowers, banks would not only risk retrieving a smaller portion of their outstanding loans than they would by restructuring, but also wasting all the time and effort they have already invested in developing a relationship with their borrowers.

As much as creditors are frustrated and sometimes angered by the actions of their nonpaying borrowers, no creditor, as a professional, would create a "vendetta" type of situation and deliberately throw their debtors into the hands of the courts. It is unlikely that creditors have declared "payback time" against their debtors since the commercial courts opened its door for business several months ago. And hopefully that day will never come.

If creditors are perceived as being rigid during debt negotiations, it is due to the fact that banks have money, most of which is not theirs, to protect. As financial intermediaries, banks channel publicly owned funds, placed with them in the form of deposits, into the economy through various business activities. These activities hopefully generate returns to please both their depositors and shareholders.

While banks attempt to generate profits, they are also required to safeguard their funds. That's where prudence plays an important role.

When the risks become greater than anticipated, banks redeem their loans in the interest of preserving their depositors' money. As banks are accountable to shareholders and, more importantly, deposit holders, the recovery of loans that have turned sour becomes an important priority. Logically, a certain degree of rigidness to achieve these objectives is sometimes required.

It should be realized that most creditors understand the condition that most borrowers are in right now, and are usually prepared to accept a workable solution to let their borrowers maintain current business operations while progressively repaying outstanding obligations to the banks.

A large number of banks even accepted the consequences of the risks they took in loaning out their money, by writing off from their books a certain number of nonperforming and nonretrievable loans. It is after all a business risk that the banks agreed to take, and acknowledging losses is only a natural consequence of such risks.

Borrowers must also come to terms with the concept of risk, and realize that in the world of business there are losses to bear. Sometimes these losses are unacceptable, especially the losses or the dilution of ownership which occur in a debt to equity settlement.

Therefore it is important for debtors to work closely and in good faith with their creditors to achieve a satisfactory loan restructuring. Creditors are generally open to constructive ideas and proposals from their debtors, not only for the purpose of getting their money back, but also in the interest of their borrower's survival.

Therefore, honest and open disclosure on the borrower's end would clearly facilitate a successful compromise. On the contrary, hiding one's capacity to repay loans beneath piles of numbers and financial projections will only jeopardize ongoing talks, while bringing debtors closer to the doorsteps of the commercial courts.

This is where the Jakarta Initiative comes into play, not only by encouraging borrowers to sit down with lenders to solve their debt problems, but also by communicating the principles of debt restructuring to Indonesian borrowers. It is understandable that hardly any of the country's local borrowers understand how to overcome a debt problem of the magnitude of nearly US$70 billion in private sector debt alone.

By advising borrowers that going through the pains of restructuring is more beneficial than being liquidated to bits and pieces by the courts, the Jakarta Initiative can likely return borrowers to the negotiation table to figure out a mutually beneficial solution with their lenders. Uncooperative borrowers should recognize that eventually they will, unfortunately, face uncooperative creditors and end up with much less than what they had hoped for.

Again, it is important to stress that creditors are committed to seeing their customers pull through the crisis, not only to secure the repayment of their loans but also to ensure future growth with these businesses. Therefore it is essential to move ongoing debt talks ahead in a manner where both borrower and lender will foresee the benefits of restructuring.

Neither party can gain anything without first giving something away, because in restructuring every winner must somehow lose something along the way.

The writer is a corporate finance director at American Express Bank.