Recap bonds may be swapped for higher rate notes

Recap bonds may be swapped for higher rate notes

JAKARTA (JP): The government will soon allow banks to exchange
up to half of their fixed-rate recapitalization bonds with new
government bonds carrying a higher coupon rate in a bid to
attract buyers, a senior finance ministry official said on
Monday.

Director general of financial institutions Darmin Nasution
said that the new policy was aimed at helping banks with a
liquidity shortage problem to sell their recapitalization bonds
to the market.

"The new policy will be implemented sometime at the end of
November," Darmin told reporters on the sidelines of a plenary
session with the House of Representatives.

Darmin said that the government would decide which banks were
eligible for the new facility.

"We'll issue the list of banks suffering a shortage of
liquidity," he said.

The government has issued more than Rp 400 trillion worth of
bonds to finance the recapitalization of state and major private
banks. The state budget covers the interest rate of the bonds.

More than Rp 150 trillion of the bonds carry fixed interest
rates of 12 percent and 14 percent. Another Rp 218 trillion of
the bonds carry a variable rate linked to the interest rate of
the one-month Bank Indonesia SBI promissory notes. The remaining
amount of the bonds are indexed rate bonds.

Darmin said that the government was still calculating the
interest rate level of the new bonds.

But he said that if the banks agreed to exchange the
recapitalization bonds with the higher coupon rate bonds, they
must also agree to have the interest rate of the remaining bonds
lowered so that the burden of the state budget would not
increase.

"The interest rate cost covered by the government must not
change," he said.

The interest rate cost of government bonds next year is
estimated at more than Rp 55 trillion. Combined with the interest
charges of the government's foreign debt, the amount would
increase to more than Rp 77 trillion or more than 41 percent of
the government's routine expenditure.

Citing an example, Darmin said that if the coupon rate of the
new bonds was set at 15 percent, the interest rate of the
remaining bonds held by the banks could be lowered to around 9
percent.

"At this rate, the market should be attracted (to the bonds)
because the benchmark interest rate of the SBI notes is currently
at around 13.7 percent," he said.

Despite the completion of the government-sponsored bank
recapitalization program, some banks are believed to remain short
of liquidity because instead of injecting cash, the government
only put up recapitalized banks with bonds.

Raising the interest rate of the bonds is expected to help
improve the liquidity condition of the banks.

The bank recapitalization bonds have also failed to attract
investors partly because the bonds carry a lower coupon rate
compared to the SBI notes, let alone corporate bonds.

Until the end of August, the amount of transaction in the
secondary government bond market was only around Rp 9.3 billion.

Creating an active secondary market for the bank
recapitalization bonds is crucial to help reduce the burden of
the state budget in the future. (rei)