Indonesia financial sector key to recovery: World Bank

Indonesia financial sector key to recovery: World Bank

PARIS (Reuters): Restoring links between banks and corporations is the key challenge in the restructuring process required to prevent the Indonesian economy collapsing, Jean- Michel Severino, World Bank vice president, east Asian and the Pacific Region said on Wednesday.

"The vicious cycle of shattered confidence and economic downturn that is driving the Indonesian economy to the brink of collapse must be broken. The linkage between banks and corporations is the key challenge of this restructuring process," Severino told a meeting of international donors.

"At current exchange rates, interest rates and market conditions, most Indonesian corporations and small and medium scale firms are bankrupt," he said, according to a copy of his speech distributed by the World Bank, which is hosting the meeting.

"In turn, most banks are insolvent as bad debts climb to heretofore unheard-of levels," he said.

Severino said neither the international community nor the government should "bail out the private sector". But at the same time he said the World Bank believed "this exceptional situation requires an exceptional involvement of the government and of the international community".

"We are faced (with) a systemic collapse of both the corporate and banking sectors for reasons that are not all related to individual failure and the perversities of specific stakeholders," Severino said.

He also said that supporting Indonesia while it struggles to get its economy working again "will take humanitarian assistance on a very large scale".

"It will take donor commitment, not just for this year but for next year and the year after at least," Severino said.