RI banking sector reforms draw wary response in U.S.

RI banking sector reforms draw wary response in U.S.

NEW YORK (Reuters): The Indonesian government's banking and
corporate sector reforms offered a glimmer of hope that steps may
finally be taken to shore up the financial system, U.S.-based
analysts and banking sources said.

But they added that the sketchy details unveiled on Tuesday
left many questions unanswered.

"The mechanics are not clear," said Luis Luis, director of
emerging markets research at Scudder Stevens and Clark. "The big
error is that the Indonesian government did not do it earlier."

The broad financial sector reforms include government
guarantees of bank obligations and opening the sector to foreign
ownership. The government also announced that indebted companies
would temporarily halt debt repayments in order to work out
arrangements with borrowers and lenders.

Luis said the Indonesian government has to tackle the twin
problems of insolvency and illiquidity in the banking system to
restore confidence.

The recapitalization of insolvent banks could involve boosting
bank reserves through selling bad loans to government agencies or
swapping loans for equities.

But the U.S market will watch closely to see just how the
central bank would provide basic liquidity without simply
printing more money, Luis said.

U.S. experts were also skeptical of the Indonesian
government's ability to offer guarantees for depositors and
creditors at all the country's commercial banks.

"It's like signing a blank check," said a banking source. "The
claims and contingent claims could add up to some huge numbers."

The commitment smacked of "hollowness" unless there was some
reliable figure defining the liabilities, he said.

To be sure, Indonesia tried to tackle the financial sector
problems in November by closing 16 financially troubled banks as
part of the conditions for receiving a $43 billion bailout from
the International Monetary Fund.

"The Indonesian government should have strengthened liquidity
in the banking system, while weeding out the weak banks," he
said.

The debacle showed that the ramifications of banking reforms
in Indonesia remain uncertain, the analyst said.

Compared to the long-term impact of banking reforms, the
emergency measures to allow indebted Indonesian companies to halt
debt payments was downplayed by some analysts as an extension of
the status quo.

Many Indonesian companies, hit by the rupiah's slump since
last August, had already asked their creditors for delayed
payments and the government simply formalized the arrangement,
said Feroz Talyarkhan, managing director of Asian fixed income
research at Bear Stearns and Co.

The rupiah was at 2,755 to the dollar when Indonesia abolished
its system of exchange rate bands on Aug. 14, and fell to as low
as 15,000 early this month. It rose to 11,000/11,200 on Tuesday,
in part boosted by central bank intervention.

London

In London analysts said a clear-cut resolution to Indonesia's
foreign debt problems is unlikely.

While some believed an agreement was possible on some form of
Brady bond -- U.S. Treasury-backed instruments used in the past
to help developing countries pay off defaulted loans -- others
said that type of restructuring was out of the question.

They said it was more likely that individual agreements would
need to be reached between foreign lenders and Indonesia's
private sector.

Indeed, if the government did not guarantee the country's
private debt and repackage the corporate sector debt into a
government bond issue, analysts said creditors would certainly
lose out.

"Today's announcement was just an official recognition of what
everyone already knew and it has been the case that corporates
have not been paying their bills on external debts for some
time," said Sara Zervos, emerging market strategist at BZU.

Indonesia said it estimated some 228 companies in the country
had problems debt servicing problems.

Approximately $66 billion of Indonesia's $140 billion in
overseas debt consists of corporate debt, although not all of
that amount will be affected by the servicing freeze.

"They are going to have to do individual agreements. I don't
see a national restructuring plan as a strong possibility," she
said.

"This is going to be a long-term process because...when you
have that many creditors and that many companies it's going to be
hard to come up with a cohesive agreement on a broad scale like
what Korea is going to be doing."

Brady bonds were named after former U.S. Treasury secretary
Nicholas Brady who proposed a plan in the late 1980s to help
reduce the debts of developing countries with IMF and World Bank
funds through bonds typically collateralized by U.S. Treasury
securities.

Another emerging market debt specialist at a foreign bank in
London also doubted the viability of a Brady-style plan.

"It may be something that smells of it but it won't be a Brady
plan," he said.

"It may be some kind of restructuring where the state takes on
the obligations of the corporates but it is all up in the air at
the moment," he added.

Other analysts were a bit more optimistic, believing that
although exchange controls could not be ruled out, a
restructuring deal was on the cards later on.

"I think there is a possibility that we still may get capital
control...but once things have calmed down a bit we will get some
formal restructuring agreement and that can only be good," said
Neil Lockwood, senior emerging market analyst at ANZ Investment
Bank in London.

"It will put an end to all the uncertainty and it will ensure
that everyone will be paid, albeit they may have to wait some
time."

Asked what type of deal might be struck, Lockwood replied:
"The most likely would be a formal bond, a Brady style issue and
that is the kind of thing the Koreans have tried to avoid, but
whether the Indonesians have got such a strong bargaining
position I very much doubt."