Indonesian debt difficult to handle, HK analyst says

Indonesian debt difficult to handle, HK analyst says

HONG KONG (Reuters): Indonesia's debt, the subject of
International Monetary Fund talks in Jakarta this week, is
expected to be much more difficult to manage than South Korea's.

"It was hard enough in Korea when they were able to work with
banks that were more recognized," said John Seel, sovereign
analyst with Bear Stearns in Hong Kong.

"How do you go about packaging Indonesia paper? It's much more
difficult to price it than a government bond."

Meetings between South Korean officials and foreign bankers to
refinance more than US$40 billion in short-term paper due by
March 31 went a long way towards stabilizing the nation's
financial markets, analysts said.

With the won gaining ground and foreign investors trickling
back into Seoul's stock market, the banking talks and Seoul's
pledges to implement economic reform appear to have taken the
wind out of Seoul's financial storm, at least for now.
Jakarta's situation is substantially different.

Not only are markets still waiting to be convinced of
Indonesia's commitment to economic reform, mounting political
uncertainty fueled by calls for President Soeharto to step down
have made international bankers nervous.

In addition, Indonesia's private foreign debt burden of
US$65.6 billion is spread among hundreds of corporations with
issued paper of widely differing quality.

In South Korea, Seoul's tradition of policy-directed lending
centralized bad debt within the banking system and among a
smaller number of huge conglomerates.

This made coordination with international bankers much easier
for Seoul than it would for Jakarta, analysts said.

"The main issue is how to (value) private sector debt that
varies so widely in quality," said Seel.

The IMF arranged a $43 billion package of rescue loans for
Indonesia in October and hopes to announce on Thursday a "very
solid agreement" on the economic reforms that Jakarta will
implement in return for the money.

Indonesia owes foreign financial institutions $118 billion in
total. Government overseas debt amounts to US$52.4 billion while
commercial paper and promissory notes and other paper amounts to
US$15.3 billion.

South Korea, which has negotiated a US$58.3 billion IMF
package, owes about US$153 billion overseas with US$80 billion of
it short-term. Seoul is considering issuing government guarantees
for some of this debt in order to meet demands from international
banks for a longer-term solution to the problem.

In the meantime, foreign bankers have agreed to roll over
US$40 billion in short-term debt for another 90 days.

But analysts said the same sort of deal would be extremely
difficult to achieve in Indonesia.

"The international banks will try to establish some sovereign
guarantees but I don't think it's the same situation as in
Korea," said Chris Tinker, head of regional economics at ING
Barings in Hong Kong.

First, the Indonesian government would have to agree to
guarantee the debt, something it has resisted doing so far. Then,
the foreign banks would want a guarantee for the Indonesian
guarantee, probably from the United States.

"In Indonesia, the banks screwed up on their own. It was less
a matter of policy and more of corruption. The government
wouldn't want to take up responsibility for that," Seel said.
And then there was the politics to consider.

Government guarantees for the ethnic Chinese community
responsible for much of Indonesia's business activity could be
problematic, and winning support in the U.S. Congress for any
proposal backed by the U.S. Treasury, like the 1995 rescue of
Mexico, would be extremely difficult, analysts said.

Seoul's strategic position cheek-by-jowl with the isolated,
Stalinist regime in North Korea and the sheer size of the South
Korean economy gave the United States much more motivation to
help Seoul than it would Jakarta.

"And it'd be harder now than it would have been a couple of
months ago," Seel said.

Indonesia's credibility was going to take a lot longer to
return following the market routs of the past few weeks, even
though the increased jitters could add to the temptation for
people to provide guarantees to restore credibility quickly.

"But I'm still not sure that's a good idea, or that it would
fly -- that you'd be able to sell it politically," said Seel.
So what are the options?

Jake van der Kamp, equity strategist at ABN Amro Hoare Govett
Asia, said there really is only one option in Indonesia -- a
rollover and a huge writedown by foreign banks.

"This, in the end, is a private sector problem, and a lot of
this comes down to foreign banks being too eager to lend money to
foreign companies they didn't know enough about," he said.

"It's their fault, and they're going to have to take the
loss."