Indonesian reports shake sentiment in debt market

Indonesian reports shake sentiment in debt market

HONG KONG (Dow Jones): The fragile sentiment in Asian debt
markets was shaken yet again this week as reports that Indonesia
had defaulted on its sovereign debt sent yields soaring and
worried bankers into conference rooms.

The Indonesian government later denied it had defaulted on any
sovereign debt payment, saying it had simply begun implementing
the planned sovereign debt rescheduling accord with its Paris
Club group of government creditors.

And although debt market participants heaped criticism on the
government for not being more transparent about the debt
rescheduling, credit rating agencies were more sanguine in their
appraisal of the situation and Indonesia's already battered
sovereign ratings are expected to remain at current levels for
the time being.

The initial, vague report on Tuesday of an Indonesian default
sent shock waves through an already jittery market.

The yield on Indonesia's sovereign bond due in 2006 jumped
almost 100 basis points during Wednesday's session to an eye-
popping 995 basis points over equivalent U.S. Treasurys. A basis
point is one one-hundredth of a percentage point.

Soon after the report hit the market, the Indonesian rupiah
weakened to 13,550 against the U.S. dollar, before rebounding to
12,900 late Thursday.

The report "spooked a lot of people," said Damien Wood at
Barclays Capital in Hong Kong.

Many market participants laid much of the blame for the panic
on the performance of Coordinating Minister for Economy, Finance
and Industry Ginandjar Kartasasmita and other government
officials.

"Ginandjar was too late in announcing this, he should have
done so before the news spread out in the market," said Pardy
Kendy, the treasury chief at PT Bank Buana in Jakarta.

Late Tuesday, after the initial reports of a default swept
through the market, Ginandjar announced that the country was
implementing a previously agreed restructuring with its Paris
Club government creditors and the International Monetary Fund.

"We have already notified the Paris Club about this...we are
actually not reneging, just implementing the agreement," he said.
"This was badly handled by the government," said one Jakarta-
based foreign banker. "With confidence so low, this is the kind
of information people should know about well in advance of
payment coming due."

But the lack of clarity in news reports didn't help matters.

As initial reports cited commercial bank officials stating
that Indonesia had missed a principal payment on sovereign debt,
some market participants assumed the country had defaulted on an
unsecured commercial debt obligation, which would have triggered
credit default swaps and an array of cross default pledges,
sending the country into a tailspin.

Other debt market sources were unaware the debt restructuring
had begun and interpreted the reports as a willful default on
bilateral debt.

One of the banks named in the reports, Credit Agricole
Indosuez, later clarified that Indonesia had not made a principal
payment due in August, but that the debt was part of Indonesia's
bilateral obligations to the French government.

"There was a settlement for a credit export that wasn't paid
by the (Indonesian) central bank," said a Credit Agricole
Indosuez spokesman. But the spokesman added that the obligation
was part of the agreement between Indonesia and its government
creditors to reschedule US$1.25 billion in debt.

The credit export facility was guaranteed by the French
government, making the debt a bilateral government-to-government
obligation.

Credit rating agencies reacted cautiously to the market
turmoil, but indicated Indonesia's sovereign debt ceiling isn't
likely to descend further in the near term, partly because the
country's ratings are already so low.

"We are maintaining surveillance on the situation," said Paul
A. Coughlin, managing director for infrastructure and public
finance at Standard & Poor's Corp. in Hong Kong.

"With the (infrastructure and public finance) credits we deal
directly with, we don't have any information on any defaults," he
said.

"Given the rating we've got on Indonesia, there's not much
downward potential," Coughlin added. S&P currency rates
Indonesia's foreign-currency sovereign debt at Triple-C-plus,
well into the "junk" end of the ratings spectrum.

Chin Teng Sam, managing director of Fitch IBCA in Singapore,
said that even if Indonesia mistakenly missed a payment on
government debt not covered by the restructuring agreement, it
wouldn't have much impact on the country's rating.

"If it was a mistake, the ratings implications are limited,"
he said. "We wouldn't bring them down to a default rating for
that, unless it was determined that they intended to default."

Some danger of a downgrade remains, though, as Fitch IBCA
currently rates Indonesia at single-B-minus, several equivalent
notches above Standard & Poor's and the rating is on watch-
negative.

Chin notes, however, that the news out of Indonesia isn't
entirely bleak.

"We're seeing a bit of an increase in trade finance, but at a
slow pace," he said.