BANKING: Indonesian corporates
Far Eastern Economic Review
July 30, 1998
* By Salil Tripathi
Hold the celebrations: The Indonesian debt crisis is far from over.
Even though Radius Prawiro, chairman of the Indonesian
debt-restructuring team, announced "a significant breakthrough" in debt
negotiations, the achievement of his recent eight-city road show is
The agreement on offer covers the obligations of Indonesian
foreign banks. One Jakarta-based American banker says: "We have to sign
up because if we negotiate directly with debtor banks, our chances of
getting paid are much smaller." This deal addresses only 10% of the
total private debt of $77 billion, which many analysts hold principally
responsible for bringing the Indonesian economy to the brink.
The debt crisis has worsened because Indonesian companies have
stopped paying foreign creditors, citing, among other things, an adverse
exchange rate. The rupiah has lost 82% of its precrisis value. Debtor
companies hope for an umbrella agreement that would lead to banks making
substantial write-offs or accepting an artificially low exchange rate.
Sensing this, banks are not forcing the issue, as they want to avoid
spoiling their balance sheets by making those write-offs. This lack of
resolution unnerves the markets, punishing the rupiah further.
There are two ways to fix the problem. Banks should forgive
the debt. And Indonesia must make sure that the bankruptcy courts it
establishes in August will work efficiently and credibly. Although
there's been a law on the books since 1905, lawyers say they can't
recall a bankruptcy in recent years.
Some banks still believe in the fiction that eventually all
be paid, a European banker in Singapore says. But under a June
agreement, creditor banks can provide for losses over eight years,
reducing immediate impact on their earnings and books. The agreement
also creates yet another body, the Indonesian Debt-Restructuring Agency,
or Indra, to oversee the rescheduling process. Mark Walker, partner at
Cleary, Gottlieb, Steen and Hamilton, a New York law firm working for
the Indonesian government, says: "We agree, Indra is no panacea. The
only way forward is for banks to forgive some of the debt."
Bankers in Hong Kong and Singapore say Indra is too vague to
any use. For example, there is no provision to protect creditors from
recalcitrant debtors, or debtors from unreasonable repayment regimens.
It only provides a framework for negotiations.
David Carbon, chief economist for Asia at Credit Lyonnais Securities,
says: "If foreigners are to come in, the system being put in place has
to work. Without a credible system of dealing with corporate debt and
bankruptcy, uncertainty will remain."