Reviewing debt deals

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.