How does the Jakarta Initiative measure up?

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.