Date: Thu, 15 Jan 1998 12:49:30 -0800 (PST)|
From: MichaelP <firstname.lastname@example.org>
Subject: RE: IMF Blunder
Indonesia: Crippled banks imperil attempts at financial restructuring
By Peter Montagnon and Sander Thoenes,
in London Financial Times
15 January 1998
Today's London Times includes a story about IMF acknowledging past
blunders in a "secret report." It's too soon to know what the report
actually says, but here is a related FT story which suggests (to me)that
the blunder was really a supervision failure.
Indonesians have so little trust in their banks, says Theo Toemion, a
Jakarta economist and money market trader, that they have been
withdrawing money from their accounts and putting it into safe deposit
With foreign banks confirming that the central bank was unable to keep
up the supply of bank notes as withdrawals reached a peak during last
week's collapse of the rupiah, a flight into cash is evidence of the
deep crisis pervading Indonesia's financial system.
It also explains why today's new agreement with the International
Monetary Fund is expected to focus heavily on financial sector
Economists say no IMF programme can succeed without far-reaching
financial reforms designed to shake the economy free of the burden of
bad debts and restore credit to sound companies, which now even face
difficulty raising the working capital required for exports. But it is
hard to see how such reform can be designed, given the depth of the
troubles. The IMF's first attempt to do so last October backfired
after government action was confined largely to the closure of 16
"They should have gone for a big bang approach and shut down all of
the bad banks at once - or none at all," said Neil Saker of
SocGen-Crosby. "By doing it as a half-measure, they were sending the
wrong message. They wanted to show they were moving. Everybody knew
more would go, but nobody knew which ones."
Analysts say the situation has since deteriorated sharply with small
banks and even some larger private sector ones finding it hard to
raise deposits, while their loan books deteriorate in the wake of the
rupiah's collapse. "The cracks are visible in the clearing system.
There are local banks which cannot meet their dollar commitments on
the interbank market," said one foreign banker. That could drain
precious currency reserves as the central bank is forced to step in to
According to an analysis by SocGen-Crosby, the currency's fall has
decimated the balance sheets of Indonesian banks. Not only because it
has made it much harder for companies with rupiah revenues and dollar
debts to meet their obligations. It has also undermined the capital
base of large and medium-sized private sector banks whose capital is
denominated in rupiah but whose lending is on average one-third in
There is thus an urgent need for restructuring which would reduce the
total number of banks from almost 200 at present and recapitalise
those which are capable of survival, analysts say. At the same time,
Indonesia needs improved regulation and proper bankruptcy laws to
allow bad debts to be collected.
No one has tried to collect debts from the 16 banks that were closed,
says William Keeling of Dresdner Kleinwort Benson. This means the
large bad debt problem remains unaddressed. Eventually companies will
have to be allowed to go bankrupt. The state may have to take
responsibility for the bad debts and sell off the affected assets.
So far, however, the central bank has moved cautiously both with
closures and the enforcement of proper accounting. Officially, bad
debts are put at only 2 to 3 per cent of loan books, but in reality
the problem is much larger, analysts say, and the authorities are
reluctant to draw attention to the problems facing large corporate
borrowers with strong political connections.
Similarly, there is concern that closure of larger banks would cause
alarm in the public, and possibly spark social unrest as depositors
tried to get their savings back. "The authorities have to intensify
their efforts at merger and acquisition and the government should
participate in this," said Frans Seda, a former finance minister.
Nor is the situation encouraging among the private banks. Bank
Danamon, one of the largest, which is known to have a weak balance
sheet, is negotiating a capital injection from the Salim group and
CSFB, the international investment bank. Bank Dagang, which is
controlled by the Gajah Tunggal group, is heavily exposed to property.
Even with restructuring, regulation would be critically important
notably with regard to the need to stop intra-group lending, says Tom
Inglis of ING Barings.
"The problem isn't so much the rule book as its enforceability," he
International faith in the first IMF package was upset following the
efforts of one of President Suharto's sons, Bambang Trihatmodjo, to
prevent closure of his Bank Andromeda. After threatening the finance
minister with a lawsuit, he was allowed to acquire another bank, Bank
Alfa, which now operates from the original bank's premises. Whether
the new programme will fare better remains to be seen.
Copyright the Financial Times Limited 1998
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