RI plan won't work, 'agreement needed'

RI plan won't work, 'agreement needed'

LONDON (Reuters): Indonesia's strategy to solve its private- sector debt crisis will not work in its current form, a senior Western banker said on Wednesday after meeting with a government debt negotiator.

David Folkerts-Landau, global head of emerging markets research at Deutsche Morgan Grenfell, said the country needed an immediate agreement with foreign creditors and the International Monetary Fund (IMF) on a write-down of foreign currency debts.

Folkerts-Landau, a former senior IMF official before joining DMG in October, said a large part of Indonesia's corporate sector was technically insolvent, and this week many foreign obligations had gone unserviced.

Moreover some Indonesian banks had ceased to honor foreign exchange forward obligations, he said.

One solution would be offering creditors a partial government guarantee of the debt, backed by advanced disbursements of IMF funds in exchange for a writedown, he said.

"My judgment is that effort (the government's current strategy) is just not enough," Folkerts-Landau told a conference call to clients on Wednesday from Kuala Lumpur during a tour of the region.

His comments came after meeting former Indonesian minister Radius Prawiro, recently appointed by President Soeharto to negotiate with offshore banks.

"I would envision the eventual outcome will involve some form of exchange controls and/or rescheduling of external debt at a significant discount to book value."

He strongly urged the central bank to assume a lead. "It has the authority, it has the resources."

The DMG managing director said there was a "creeping nature of missing repayments, having discussions and pushing along". With interest rates above 50 percent, many firms are falling into arrears on rupiah debt too, he said.

Even some institutions which were capable of servicing obligations were choosing not to do so, preferring instead to preserve their liquidity, he added.

"In a nutshell this economy is suffering from a pervasive domestic and foreign bad debt problem and in the end this will require the writing down of the real values of the loans in both currencies."

Folkerts-Landau said that at an exchange rate of about 8,000 to the dollar the corporate sector does not have enough rupiah to buy foreign exchange needed to service external debt. It traded at a record low 12,000 on Wednesday.

Of a sample of 200 banks examined by DMG, about 40 percent of the aggregate loan book was non-performing at the end of last year under U.S. accounting standards and this was at an exchange rate of about 5,000.

"This is much more of a solvency rather than a liquidity problem," he said.

"There simply is no room here for a Korea type of solution. There are far too many debtors (in) the corporate sector and the banking sector, with a diverse number of borrowing instruments ranging from Eurobonds to short-term commercial paper."

In the absence of speedy negotiations between the government, overseas creditors and the IMF on the write-down of the debt, the currency was expected to come under more pressure.

"We expect that over the next few weeks the Bank of Indonesia will be forced to inject further emergency funds into the banks, continuing to add to the accelerating inflation and thereby further destabilizing the currency."

DMG estimates inflation is now in excess of 60 percent on an annualized basis, threatening the country's social fabric.