U.S. to Join in IMF Rescue of Indonesia

The United States is preparing to provide a $3-billion line of credit as part of a $22-billion international rescue package to help prevent Indonesia’s current financial crisis from spreading to other Southeast Asian countries, U.S. officials said Thursday.

The rescue move, to be announced today, will include loans from the International Monetary Fund and the World Bank, as well as new belt-tightening steps by Indonesia.

The loans represent the largest effort yet to counter the growing financial problems that have plagued Southeast Asia following last summer’s attack on Thailand’s currency in the foreign exchange markets.

The Clinton administration declined then to participate in a $17.2-billion international rescue package being offered to Thailand, saying it was not up to the United States to join in such efforts.

U.S. officials apparently changed their minds in Indonesia’ case, however, because the crisis there is larger and carries a far greater threat of contagion.

The Indonesian currency, the rupiah, has plunged a staggering 35% so far this year under pressure in the foreign exchange markets, and Indonesian stock prices have fallen 20%. They rose Thursday on rumor of the loans.

Administration officials said the U.S. portion of the line of credit is designed to be used as a “secondary line of defense” to bolster Indonesia’s reserves in case they are depleted faster than the loans can be disbursed.

Besides the United States, Japan, Australia, Malaysia and Singapore are expected to contribute to the contingency fund. All four also contributed to last summer’s rescue package for Thailand.

The major portion of the bailout package for Indonesia is expected to include a $10-billion loan from the IMF and $6 billion to $8 billion in loans from the World Bank and the Asian Development Bank.

There were no details Thursday on how much Japan, Australia, Malaysia and Singapore might add to the package. Officials said the full details of the rescue effort would be announced today.

The loan is expected to come with requirements that Indonesia take stringent steps to put its economic house in order, including shutting down insolvent banks and easing price controls on food and fuel.

Some officials said the IMF also might require that Indonesia’s President Suharto abandon--or at least cut back--several projects that benefit the ruler’s family and friends.

Among the pet projects that may be modified as a result of IMF conditions is the clove monopoly controlled by Suharto’s youngest son, Hutomo Mandala Putra, said officials who asked not to be identified.

Shares of PT Gudang Garam, a maker of clove cigarettes that accounts for 11% of all the money in the Jakarta Stock Market composite index, rose 13% on speculation that the clove monopoly would end, traders said.

Bank Indonesia Gov. Soedradjad Djiwandono has said in the past that the central bank is nursing “unhealthy” banks and that it would eventually close them down. Officials today said about 17 wobbly banks could be closed.

The government is also likely to begin phasing out a fuel subsidy that’s long been a target of criticism from the World Bank and international economists, the officials said.

Although Indonesia has been one of Asia’s fastest-growing economies, the country has been hurt by weakness in its financial system, poor regulatory practices and excessive real estate speculation.

The U.S. portion of the credit line being offered to Indonesia will not require congressional approval. Instead, it is being offered under the exchange stabilization fund, administered by the Treasury Department.

U.S. officials stressed that the money would not be used unless the country’s reserves were in danger of being depleted and unless Indonesia were fully in compliance with IMF belt-tightening requirements.

Although use of the exchange stabilization fund is normal for providing such lines of credit, the administration is expected to run into some criticism in Congress, which often has objected to such loans.

It was not immediately clear whether the administration was considering making similar lines of credit available to other troubled Southeast Asian economies.

Such bailouts are necessary because when a country’s currency is under attack in the foreign exchange markets, the devaluation erodes its reserves and increases the cost of servicing its debts.

While Indonesia has a relatively small balance-of-payments deficit, authorities have been fearful that the currency crisis could spread to other Southeast Asian countries--and even to Latin America as well.

The United States was the major architect of a multibillion-dollar bailout to Latin America in the early 1980s after Mexico defaulted on its bank loans, setting off a spiral that threatened the entire hemisphere.

Since then, bank lending to Third World countries has lagged, while foreign investment--in the form of purchases of stocks and bonds and investment in factories and real estate--has mushroomed.

The outbreak of the financial troubles in Thailand last summer set off a round of mini-crises that have hurt businesses in the Philippines, Malaysia, Indonesia and Hong Kong.

Bloomberg News was used in compiling this report.