New Indonesia pact still leaves creditors waiting

New Indonesia pact still leaves creditors waiting

HONG KONG (Reuters): Indonesia's new agreement with the
International Monetary Fund offers little cheer to foreign
creditors waiting to be repaid by the country's borrowers,
financial sources said yesterday.

"People are getting a little jaded by Indonesia. I don't think
anyone was paid in the last week from Indonesia and companies
aren't even paying their rupiah debt," said a fixed-income fund
manager in Hong Kong.

"And what can people do? There is really no legal structure in
Indonesia for people to get their money," he said.

According to Bank for International Settlement figures,
outstanding loans to Indonesia from major international banks
were US$58.7 billion by the end of June 1997.

Unlike in Korea, where borrowing tends to be concentrated
among a handful of banks, there are many Indonesian borrowers and
many of these are corporations.

In a letter of intent signed with the IMF, Indonesian
President Soeharto drastically revised the economic assumptions
presented in the recent budget, agreed to cut subsidies on fuel
and other commodities and promised to cut key monopolies, some of
which favored his children.

The Indonesian government also reiterated that it would not
bail out its debt-ridden companies. Instead, Indonesian firms are
expected to muddle through as they have been, paying debts when
they can and restructuring or rescheduling when they can't.

Bankers said that many Indonesian firms, burdened by a sharply
depreciating currency, have not been able to pay.

"Most of the reform measures were expected," a senior analyst
at Nomura Securities in Tokyo told Reuters. "What really is
shocking is that (Soeharto) said the government will not bail out
the private sector debt."

Japan banks hold some US$23 billion, or 39 percent, of
Indonesia's debt, according to the BIS.

But John Seel, sovereign analyst at Bear Stearns in Hong Kong,
said Soeharto was right to steer clear of guarantees.

"That's been one of the better parts of Indonesia's policy all
the way through this," said Seel.

"I think they are happy to let companies default and work
things out with their creditors, which is not great but it is
better than having the government take on those obligations or
declare a debt moratorium," he said.

While Japanese banks are most heavily exposed to Indonesia,
many analysts said they are more worried about the exposure of
the troubled Korean banking sector.

Unlike Japanese banks' exposure to Indonesia, which tends to
be in the form of loans to local subsidiaries of Japanese firms,
analysts said most Korean bank loans were made directly to
Indonesian entities.

"I think the exposure of the Korean banks is huge. The Koreans
were extremely aggressive around Indonesia in the last two years,
whereas the Japanese were very aggressive four years ago. And a
lot of the debt is short-term," said the Hong Kong fund manager.

Bankers said one effect of Indonesia's debt woes is the growth
of a distressed debt business in Asia.

"A lot of banks, including the Japanese banks, want to dispose
of this kind of distressed debt because if they carry it on their
balance sheets they have to fund it at a premium," said a
syndicate manager at a European bank.

He said that while Asian defaulted debt isn't really traded,
there are investors willing to take it with the expectation that
at least some of it will be repaid in future.