What’s Behind U.S. Bailout Money?

The Clinton administration’s decision to provide a $3-billion line of credit to Indonesia should help bolster U.S. credibility in the Far East and, the government hopes, douse the economic flames that have spread across the globe in the last few months.

The United States also sought to add its voice in support of the demands of the 181-nation International Monetary Fund that, in return for financial help, troubled countries agree to significant reforms in the way their economies operate.

Many developing countries--particularly the once rapidly growing Asian “tigers” such as Indonesia, Thailand, Singapore and Malaysia--argue that the IMF’s prescriptions are too bitter a pill for them to swallow.

The promised $3 billion from the administration would be secondary to a much bigger bailout announced Friday. The first line of loans will offer Jakarta a total of $23 billion, mostly from the IMF, the World Bank and the Asian Development Bank. The U.S. bilateral support would be drawn down only if the other funds are drained in the bid to bolster Indonesia’s economy.

But the nominal U.S. support was seen as significant because Washington was widely criticized when--for fear of a political backlash in Congress--it refused to take part in a similar rescue effort for Thailand in July. Washington said the rescue was primarily the obligation of Japan, just as the U.S. had led the bailout of its neighbor Mexico in 1995.

Since then, the devaluation of Thailand’s currency has spread through much of Asia, inflicting long-term damage on the region’s prospects. The contagion hit Hong Kong late last week, triggering the huge U.S. market nose dive and related troubles in Latin America this week.

“I think it’s very significant that the U.S. has decided to participate in a bilateral way,” said Tim Condon, an analyst at Morgan Stanley Asia in Hong Kong. “Clearly what the U.S. has said is they feel the currency contagion in Southeast Asia could spread instability to currencies and stock markets around the world, and Indonesia is a good place to draw the line.”

The IMF has already lent $1 billion to the Philippines, and it masterminded a $17.2-billion international loan package for Thailand. But the Indonesian package is both far bigger than the ones that went before and structured somewhat differently.

Announcements Friday and pledges made in the past indicate that contributions from bilateral donors could add some $17 billion to the package, including the $3 billion from the United States. Australia, China, Hong Kong, Japan, Malaysia and Singapore are among those ready to participate in bilateral efforts, said Michael Camdessus, managing director of the IMF.

But U.S. officials fear some of those nations won’t demand reforms in return for the money.

Washington’s hope is that the IMF package will be enough to stabilize the Indonesian economy and that Jakarta will never actually have to draw on its offer of $3 billion.

The problems plaguing Jakarta are similar to those that have dragged down other Third World countries: Its financial system is weak, government regulation is ineffective, and real estate speculation is out of hand.

With similar crises looming in Malaysia and the Philippines--and the possibility that the troubles could spread to Latin American countries such as Brazil and Argentina--Washington wants the IMF to hold firm.

The U.S. credit is a clear signal of where Washington stands on issues of reform. Its terms prohibit Indonesia from using the money unless it is fully in compliance with an IMF program--a position it is far from achieving.

Norman A. Bailey, a former National Security Council Third World debt strategist, said the steps Indonesia will have to take to comply with the IMF’s demands are significant--and politically difficult.

It must close unhealthy banks, reduce food subsidies, remove protectionist trade barriers and end inefficient state-run monopolies--all of which have contributed to the current instability in the markets.

“It would appear that the Indonesians have decided to bite the bullet,” Bailey said.

Several of the Southeast Asian countries, which have enjoyed heady growth rates for some 15 years, have been reluctant to accept IMF bailouts because of the strings attached. Indeed, the suddenness of the last few months’ roller-coaster ride has prompted policymakers in the tiger economies, especially Malaysia, to lash out and blame Western capitalists.

Jeffrey E. Garten, dean of the Yale School of Management and a former commerce undersecretary, says U.S. officials feared that unless Washington stepped in, Japan and other Asian governments might go it alone with a regional rescue program without any strings attached.

At the same time, U.S. and IMF officials must look to a list of possible candidates for similar bailout efforts, ranging from Malaysia and the Philippines to Brazil and Argentina. Brazil, for example, has already spent about $6 billion this week to defend its currency in the foreign exchange markets, and has seen its stock prices fall by 35%. How much longer it can hold out is anyone’s guess.

Alan K. Stoga, a former Treasury Department strategist now with Zemi Investments in New York, muses that Treasury Secretary Robert E. Rubin “must have had at least half an eye on Latin America” when he decided to join in the package for Indonesia.

Pine reported from Washington and Holley from Tokyo.