Indonesia Acts to Revive Banks

In a move to revive Indonesia’s moribund banking system, the government said today that it will guarantee all debts and deposits, open the banking sector to foreign banks, and arrange mergers and bailouts for failing institutions.

Minister of Finance Mar’ie Muhammad said the situation called for “immediate and decisive government action.” The guarantee will remain in place for at least two years, but it does not apply to shareholdings and subordinated debt, Muhammad said.

“Should any bank encounter difficulty in making payments, Bank Indonesia, acting on behalf of the government, will immediately step in to make sure that these payments can be made. This means that the public can now rest assured: Their bank deposits are now completely safe and sound.”

The rupiah, which has lost about 80% of its value since July, was unchanged at 12,950 to the dollar after the announcement.

Confidence crashed along with the rupiah’s value earlier this month, causing depositors to yank their money out of banks and convert it into dollars. As a result, the economy has ground to a halt, as banks don’t have enough cash on hand to honor daily transactions. Imports and exports are frozen as foreign banks have stopped accepting Indonesian letters of credit, investors have pulled out of pending projects, and executives traveling overseas say they aren’t even able to use their Indonesian-issued credit cards to buy lunch.

The reform plan unveiled Tuesday aims to convince depositors that their money is safe in local banks and to reassure creditors that they will be paid, although in rupiah rather than foreign currency.

Indonesia has about $140 billion in external debt and about $65 billion in corporate debt. The government said it will not bail out private companies, but it called for a grace period on loan-servicing so debtors and creditors can work out new repayment arrangements.

“We hope this will bring the money out from under the mattresses,” said one official involved in the restructuring.