Reviewing debt deals

It is comforting to note that President Abdurrahman Wahid acted quickly to end the controversy caused by inconsistent and contradictory statements by senior economic officials about the agreements hastily drawn with five conglomerates in October, 1998, for the settlement of billions of dollars of their debts to the central bank.

The government reiterated its strong commitment to any legal contracts sanctioned by the present and previous governments, by announcing on Tuesday that the Masters of Settlement and Acquisition Agreement (MSAA) between the Indonesian Bank Restructuring Agency (IBRA) and top business groups, for the settlement of about Rp 112 trillion (US$12.5 billion at the current exchange rate) in debts, would not be unilaterally scrapped.

The final decision, adopted at a Cabinet meeting on economic affairs on Monday afternoon, removed the confusion set off by contradictory statements by Coordinating Minister for Economy, Finance and Industry Kwik Kian Gie and IBRA chief Cacuk Sudarjanto late last month. Kwik initially stated that the debt settlement deals would simply be canceled, arguing that their enforcement would cause the state to lose at least Rp 80 trillion. He later moderated his stance, saying that the agreements would only be reviewed. Cacuk, however, staunchly defended the agreements, arguing that scrapping them would severely damage the credibility of IBRA in disposing the assets, worth about Rp 600 trillion, that it took over from closed and nationalized banks.

The government is really encountering a dilemma with regard to the MSAA, which was hastily concluded in October, 1998, to recoup the equivalent of billions of dollars in emergency loans extended by the central bank to bail out banks formerly controlled by the conglomerates. Simply canceling the agreements would wipe out whatever little credibility the government still has amid the extreme lack of law enforcement, fragile security condition and political uncertainty. Such unilateral action would also sabotage IBRA's present efforts to sell some of the assets to help plug the state budget deficit. But implementing them without any amendments would cause the government to lose billions of dollars due to the steep fall in asset value.

IBRA was under such tremendously strong political pressure in late 1998 to recoup the loans that it did not have enough time to thoroughly audit all of the hundreds of enterprises and independently appraise numerous other forms of assets pledged by the debtors to repay their debts.

One of the terms of the agreements that was then accepted as the best of an unfavorable set of options, but is now seen as legally flawed, was related to the clause that absolved the debtors of criminal wrongdoing in breaking banking rules.

Also seen now as quite damaging to the interests of the state is the other clause that discharged the debtors of any obligation to settle any balance that could arise later between what they had pledged and the amount of their debts.

These terms seemed to have been overlooked then as IBRA focused its attention on getting the top debtors to sign debt- settlement deals in an effort to recoup as much of the debts as possible. It was then regarded as less beneficial to the national interests to put the debtors in jail but leave their debts unrepaid.

Reviewing the deals would seem to be the best solution that would not affect the government's credibility in regard to honoring its commitments. But this review should involve independent auditors, appraisal companies and lawyers and be made as quickly as possible so as not to hold up IBRA's asset sales for any length of time.

The government obviously cannot do much in the way of legal claims if the sharp decline in the value of the assets has really been caused by the market condition. However, if the asset degradation was in the first place caused by the debtors themselves, then the agreements can be declared as legally flawed even by international standards. For that means that the debtors entered into the negotiations and the agreements in bad faith.

If the government claim is legitimate that many of the pledged assets were not covered by proper legal ownership titles or the assets turned out to be disputed by other parties, then the government has every legitimate reason to rework the deals and to file criminal proceedings against the debtors.