Insolvent banks 'should not be liquidated now'

Insolvent banks 'should not be liquidated now'

JAKARTA (JP): Forcing problematic banks to liquidate in the
midst of the ongoing monetary crisis would further deteriorate
confidence in the country's monetary sector and could spark a run
on banks, the Econit Advisory Group says.

Econit's director Laksamana Sukardi said yesterday the
government should not act hastily in forcing problem banks to
liquidate and consolidate because such a measure could create new
panic among customers and further damage the banking industry.

"It's likely bank liquidation would be done discriminately
with banks owned by politically well-connected businesspeople
escaping the axe," Laksamana said.

Such bias would cause uncertainty among people, and might
worsen the public's confidence in the banking industry. This
would in turn start a massive bank run where customers would move
their funds to foreign banks, he said.

"The confidence crisis will soon spread to other banks which
are perfectly healthy," he said.

Laksamana said the International Monetary Fund (IMF), which
was negotiating with the government on a bailout package to solve
the economic turmoil, might demand the liquidation of unsound
banks as part of a deal.

But the IMF probably knew very little about the country's
economy and the potential political impact of certain measures if
taken, he said.

"This is not the United States, where policies are implemented
equally. The risk of partiality on the part of the government is
big," he said.

Citing Thailand as an example, he said the country's banking
sector, which had suffered liquidity problems, had to be
suspended because of massive bank runs.

The independent economic think tank predicts that 1998 will be
"a year of correction", because there will be a correction in
macro and microeconomic sectors from accumulated policy errors.

"The party is over -- now it's time to wash the dishes and pay
the bill," Laksamana said.

Econit's director Rizal Ramli said Indonesia must pay the
price of the currency turmoil with lower economic growth and
purchasing power and a wider socioeconomic gap.

The super-tight monetary policy would affect the money supply
next year and would impede investment growth, Rizal said.

Indonesia would enter a "stagflation" phase where economic
growth would be slower and inflation would be high, he said.

The slow rate of economic growth next year would be followed
by lower market demand and a higher unemployment rate.

Rizal said the government must give Bank Indonesia, the
central bank, full autonomy as in other countries to enable it to
follow the dynamic activities of the money market.

The monetary council, consisting of the coordinating minister
for economy and finance, the finance minister, the central bank
governor and the minister/state secretary, only slowed down the
decision-making process to cope with the financial crisis, he
said.

He said people should not expect the International Monetary
Fund to eliminate graft practices in the country, such as
corruption, which had been widely blamed as one of the factors
that caused a loss of confidence in Indonesia's economy.

The IMF could not make corruption and collusion disappear,
Rizal said, adding that it would only be "wishful thinking".

"Everywhere in the world, collusion and corruption are
eradicated through domestic reform," he said. (das)