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.