U.S. bankers caution RI over Mexican model

U.S. bankers caution RI over Mexican model

NEW YORK (Reuters): Indonesia has targeted a Mexican plan to rescue its indebted corporations, but it will fail unless Jakarta first adopts rigorous measures to stabilize its currency and build reserves, U.S. bankers said on Friday.

Indonesia pitched a 1983 Mexican program known as "Ficorca" to the International Monetary Fund (IMF) to help its companies handle $74 billion in foreign debt that cannot be serviced with the rupiah 70 percent below where it stood last July.

But U.S. bankers with extensive experience in Latin America's restructuring programs during the 1980s and South Korea's debt exchange earlier this year cautioned that Jakarta should not view Ficorca as a panacea for its financial crisis.

"Slapping a band-aid on the private corporate sector doesn't solve Indonesia's problems," said one banker involved in restructuring talks with Indonesia.

"Some people have all of a sudden seized on a Ficorca-like program as a magic bullet," he added. "There is no magic framework that you can take."

The banker said that before Indonesia could tackle its corporate debt problem, it needed to stabilize its currency, build reserves, put trade maintenance facilities in place, and analyze the public sector to determine liabilities.

"You can't just look at this piecemeal. You need to look at it in its totality," the banker said. "Until you can stabilize the currency, most anything you try to do is going to be an exercise in futility."

Another U.S. banker involved in the talks said earlier this week that Indonesia would not achieve stability unless it approached bank obligations and public sector debt as well as corporate debt.

"The rescheduling has to be quite comprehensive," the banker said. "It has to be viewed on the basis of what are all the components of a workout plan. You can't take one segment and work on it."

International banks on the lenders' steering committee met in Singapore this week to discuss the debt, but "philosophical differences" have arisen among creditors over how much Jakarta should be pushed to reform, one U.S. banker said.

"There has to be some sort of consensus built on what is the appropriate approach to take, and how extensive an approach to take," the banker said.

In its 1982 crisis, Mexico implemented sweeping programs to exchange debt for equity and sell off state firms, thus canceling large amounts of debt. Mexico also managed to stabilize the peso in 1983, after an 80-percent drop in 1982.

The Ficorca program allowed Mexican companies to repay their foreign debt in pesos to Ficorca, which then paid foreign creditors in dollars. The Mexican government technically did not assume the loans, only the foreign exchange losses.

Ficorca restructured corporate debt to be paid over an eight- year period, in which firms made interest payments over the first four years, and began repaying capital after that.

Ficorca eventually covered about $14 billion in foreign loans taken out by some 1,200 Mexican corporate borrowers.

Bankers said South Korea's resolution of its credit problems in late February may have lulled Indonesia and its creditors into a false sense of optimism.

Global banks agreed with Korea to exchange some $24 billion in bank debt for new paper, thus easing that nation's liquidity crisis.

But Indonesia's problems are structural, and do not center on liquidity, which will take far longer to resolve, bankers said.

"This problem is going to take years to fix," one banker said. "This problem is so much more dramatic than anything that happened in Latin America in terms of devaluation, financial sector problems, etc."