The $17.5b controversy

The $17.5b controversy

The politics involved in resolving the four-year dispute
between the government and Bank Indonesia with regard to who is
responsible to recoup the Rp 144.5 trillion (US$17.5 billion) in
emergency liquidity loans extended by the central bank to bail
out banks in 1997 and 1998 seems to have gone all the way back to
square one.

While the finance ministry, the central bank and the House of
Representatives are finalizing an agreement to resolve the
dispute, Chairman of the Indonesian Bank Restructuring Agency
(IBRA) Syafruddin Temenggung asserted at a hearing with the House
finance commission last week that his agency did not accept the
base amount used for the burden-sharing.

Syafruddin contended that when the government took over
responsibility for the loans from the central bank and
transferred them to IBRA only Rp 129.42 trillion of the total
were backed up by collateral, and of that amount only Rp 12.34
trillion had any commercial value.

Syafruddin's bone of contention could jeopardize the
provisional agreement that the finance ministry, the House and
Bank Indonesia are about to finalize within the next few days
because the House seems to be having second thoughts now about
the formula for the burden-sharing.

The three parties had previously agreed, in principle, that
the government would reimburse Rp 134.5 trillion of the total
liquidity loans to the central bank by issuing perpetual
promissory notes.

These debt instruments, called capital maintenance notes,
would not bear any interest, but whenever the central bank's
capital adequacy ratio (CAR) fell below the minimum 5 percent of
its monetary liabilities the government would pay the shortfall
to Bank Indonesia to bring its capital back to the minimum
standard. But when the central bank's CAR was higher than 8
percent of its monetary liabilities, the excess would be used to
retire some of the perpetual notes.

This solution would spare the government the equivalent of
billions of dollars annually in interest and principal payments
to the central bank because the perpetual notes would replace the
interest-bearing bonds the government had issued to the central
bank.

Yet more important is that the resolution of the dispute would
remove once and for all the uncertainty about the government
fiscal balance sheet and would enable the central bank to obtain
an unqualified opinion from the Supreme Audit Agency for its
annual financial report.

But the case now seems to be going back to the old disputes
that arose after an investigative audit by the Supreme Audit
Agency in 1999 found that Rp 138.5 trillion of the loans had not
adequately been secured by collateral and quite a portion of
these funds, supposed to be used to reimburse depositors during
the massive bank runs in 1998, had been misused by the recipient
banks for currency speculation or lending to their affiliate
businesses.

Further verification of all the liquidity loans now, as
Syafruddin demands, would be an impossible task as it would
require investigation into thousands of loan documents from 48
banks, many of which have already been shut down.

Moreover, whatever new findings such additional verifications
might make, they would be meaningless if they were not accepted
by the central bank. A protracted dispute might even force the
central bank to reclaim all the securities it had transferred to
IBRA. If this was the case, an incredibly chaotic situation would
ensue because the bulk of the assets (securities) have been
disposed of by IBRA to domestic and foreign investors.

However the burden-sharing is finally formulated, the
taxpayers will always end up as the biggest losers because it
will simply transfer the losses from one account to another
account of the state. After all, despite its politically
independent status, Bank Indonesia is nevertheless owned by the
government. Any losses at the central bank will simply reduce the
amount of profits it will be able to remit to the government in
the future.

It is beyond doubt that the dispute should be resolved
immediately, otherwise Bank Indonesia will never get a clean bill
of health from its auditors, the Supreme Audit Agency, and may
eventually be disqualified by the Basel, Switzerland-based Bank
for International Settlement (BIS) from its membership with
devastating implications on Indonesia as a whole.

Such disqualification will destroy Bank Indonesia's credit
rating and prompt foreign banks to refuse its guarantee of
letters of credit opened by Indonesian banks.

The core issue here is justice, not burden-sharing. It is of
some comfort to learn that several former deputy governors of the
central bank and former bank directors and owners found guilty of
misusing the liquidity loans have been punished with jail
sentences.

But the public believes there are still many more senior
officials and former bankers who should also be implicated in the
loan scam that remain untouched by the justice system. It is
these culprits that should be hunted down and brought to justice.