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)