Paris Club talks to avoid private debt rescheduling

Berni K. Moestafa, The Jakarta Post, Jakarta

The government said it would negotiate with the Paris Club creditor nations not to extend the rescheduling of its sovereign debts to its private debts, as it would downgrade Indonesia's country rating to selective default.

Standard & Poor's warned that rescheduling Indonesia's debts to private lenders would risk downgrading the country's long term sovereign debt rating to "selective default."

Indonesia plans to seek the rescheduling of its sovereign debts with the Paris Club, which in return may demand equal treatment for the country's private debts.

"We will negotiate not to restructure the private debts," said Syafruddin Temenggung, deputy minister for International Cooperation.

Indonesia's current country rating is CCC. The lower the rating, the higher the perceived risk of Indonesia defaulting on its debts.

Dropping to selective default status could prompt lending institutions to charge higher interest rates to reflect the added risk of investing here.

This would then worsen an already sluggish investment climate, and discourage foreign investors from coming here.

Coordinating Minister for the Economy Dorodjatun Kuntjoro- Jakti has since made it one of his priorities to improve the country's investment rating.

His economic team, which came into office last August, has managed to improve Indonesia's working relations with foreign lenders.

But analysts have said the progress of economic reform has been too slow and, combined with a deterioration in the global economic climate, made a rating improvement difficult.

According to Bank Indonesia deputy governor Miranda Goeltom, Indonesia's rating might drop to selective default during talks with the Paris Club.

"Normally the Paris Club demands that private debt, like bonds, should receive the same treatment. This is what lowers a country's rating to selective default according to S&P," she explained.

But she added that, if Indonesia could convince the Paris Club not to restructure its private debts, its rating would return to the previous level.

She said that Indonesia had thus far been able to meet its bond payment obligations.

Bowing to the Paris Club's demand to defer payment would add to the risk of non payment for bondholders, hence the lower rating.

Indonesia's private debts consisted of Euro and Yankee bonds, which she said were of a relatively small amount.

Elsewhere, Finance Minister Boediono said the Paris Club meeting was slated for the first week in April.

The Paris Club groups together Indonesia's largest sovereign creditors. Its upcoming meeting would be the third occasion on which Indonesia had asked for a rescheduling of its massive foreign debts.

Securing a Paris Club deal will ease pressure on the state budget, which must set aside some Rp 43.96 trillion (about $4.2 billion) for foreign debt payments this year.