| BUSINESSWEEK ONLINE : JUNE 14, 1999 ISSUE | ||||||||
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| INTERNATIONAL -- ASIAN BUSINESS
A Bank Bailout That Might Turn Indonesia's Tide (int'l edition) Billions in state-backed bonds could refloat the economy After an interminable two- month delay in mounting an operation to clean up Indonesia's ailing banks, the Finance Ministry finally swung into action on May 28. Just meeting an International Monetary Fund deadline the same day, it announced the first phase of a massive bailout that will eventually cost $44 billion or more. The sense of relief that ran around Jakarta's financial district was palpable as the ministry issued a torrent of government bonds. Initially, it gave $13 billion in bonds to seven private banks, including Lippo Bank and Bank Internasional Indonesia, and to regional development banks partly owned by provincial governments, in order to reconstitute their capital. By the end of the year, the seven state banks and nine other banks are scheduled to receive a further $31 billion in bonds. Additionally, the government repaid emergency credits that the central bank made to banks by issuing it $7 billion in bonds. MORALE BOOSTER. With the plan, most Indonesian banks have been effectively nationalized. The seven private banks, for example, gave the Finance Ministry 80% of their equity to get new capital, though the old owners retain day-to-day management control. The large cost of the operation adds hugely to Indonesia's existing government debt of $65 billion. Interest payments on the new bonds, ranging from 12% to 29%, will cost $4.2 billion in the first year. Half will be financed out of the national budget and the remainder from the sale of bank assets by the Indonesian Bank Restructuring Agency, which controls 12 nationalized banks. Now there's hope that the bailout will restore confidence, stabilize the rupiah, allow interest rates to fall further, and get banks lending profitably again, thus boosting the economy. Business morale has been sapped by the prolonged bickering between the Bank Indonesia central bank and the IBRA as well as by the authorities' haggling with Indonesia's private bankers. ''There are several competing interest groups in terms of how to address the country's problems,'' says Terry Chan, regional banking analyst at Standard & Poor's in Singapore. Delay was expensive, too: it added $6 million a day to the bailout costs. The approach of the country's first democratic elections in 40 years on June 7 added to the pressure for decisions. ''Bank recapitalization is as urgent a priority as holding a democratic election,'' says Bank Indonesia Governor Syahril Sabirin. Indeed, without a bailout plan approved by the IMF, Indonesia's banks would have been badly buffeted during a prolonged political vacuum. It will take at least a month to count the votes from around the far-flung archipelago, then another month or two for the leading parties to form a coalition government and for the legislature to pick a President on Aug. 24. ''We could wind up with a hung Parliament,'' warns a Finance Ministry official. ''The bureaucracy could slip into paralysis.'' TOO COMPLEX? Once the political dust settles, the government will tackle the most problematic banks of all--the seven state-run banks. By some estimates, they hold as much as 75% of the $90 billion in bad loans in the entire banking system. If all goes smoothly, the new government is supposed to issue an additional $31 billion in bonds to recapitalize them and the remaining private banks. Of course, there are skeptics who doubt whether the government and its Indonesian Bank Restructuring Agency are competent enough to execute flawlessly the complex plan. ''They're trying to put broken eggs back together, and they don't know how,'' says one Western economist familiar with the agency. Indonesian bankers are also miffed that they won't be allowed to trade the bonds they receive for six months. But Finance Ministry officials don't think they can trust the bankers to cope sensibly with a big and sudden infusion of liquidity. They fear the bankers would simply dump the bonds and then use the proceeds to start lending again to their cronies and affiliated companies--which is exactly how they ran into trouble in the first place. The bond-issue scheme may be far from perfect. But it's the only method the IMF will allow Indonesia to use to clean up its bank balance sheets. There's simply not enough cash in the economy to shore up the capital bases of the banks. It's a last-minute rescue. But at least it's a plan. By Michael Shari in Jakarta _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP |
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RELATED ITEMS A Bank Bailout That Might Turn Indonesia's Tide (int'l edition) TABLE: Indonesia's Costly Bond Package INTERACT E-Mail to Business Week Online | |||
