Indover crisis could hit RI credit ratings

Aditya Suharmoko and Rendi Akhmad Witular ,  The Jakarta Post ,  Jakarta   |  Thu, 10/23/2008 11:04 AM  |  Business

Although having less direct impact on the country's financial sector, the possible collapse of Netherlands-based Indonesische Overzeese Bank N.V. (Indover), a subsidiary of Bank Indonesia (BI), may affect negatively the country's sovereign and financial institution ratings.

Lower ratings would force the government and local companies into paying higher interest rates for their foreign-exchange loans because of higher risks.

A document obtained by The Jakarta Post from a closed-door hearing Tuesday between the House of Representatives and BI governor Boediono and Finance Minister Sri Mulyani Indrawati suggested an injection of 545.6 million euros to avoid this risk.

According to the document, a default in Indover would be treated by foreign investors as a default of the Indonesian central bank as well, because of its status as the 100 percent owner of the Amsterdam-based bank.

Lawmakers, however, are unlikely to provide any recommendation for salvaging Indover as they consider that support for bailing out the bank would be risky, noting the huge cash injection required, which might never be fully recovered in the future.

"We are unlikely to provide any recommendation for the Indover case. The President should take the initiative," said Dradjat Wibowo, member of the House of Representatives' commission XI for financial affairs, after the closed-door meeting.

"We are afraid of being probed later by the Corruption Eradication Commission (KPK) should our recommendation fail to keep Indover afloat," he said.

Neither BI nor government officials have been willing to comment on the issue.

Indover will have until this week to come up with a bailout package from either the central bank or the government to avoid being dissolved by the Dutch authority due to a liquidity shortage.

A Dutch court, on an order from the country's central bank, froze the assets of Indover due to a liquidity shortage after BI, a 100 percent owner of the bank, could not provide liquidity to support Indover to help it to weather the impact of the financial crisis.

BI claimed it was forbidden under an amendment to the Central Bank Law for it to operate a business firm effective as of January next year, and help for Indover would burden BI with responsibilities for the bank beyond that period.

Local banks, such as Bank Mandiri, Bank Rakyat Indonesia and Bank Lippo have recently announced their Indover lending exposure worth to be in excess of US$50 million.

Banks agreed to provide loans to Indover primarily due to a guarantee letter from BI, convincing creditors that Indover operations would continue forward under BI central bank ownership.

As reported on Tuesday, a copy of the guarantee letter obtained by the Post showed a commitment from BI signed by deputy governor Budi Mulya, dated Feb. 5, 2008.

"Herewith we would like to confirm that as shareholder of Indover Bank, we will continue to support the activities of the bank as long as BI owns the shares in the bank.

"In view of the forthcoming divestment of Indover Bank, it is our present intention to undertake a transfer of ownership to one of Indonesia's state-owned banks," the letter said.

Sources from foreign banks, which have loan exposure in Indover, said their senior officials were enraged at BI's decision to dissolve Indover, accusing the central bank of issuing an empty guarantee.

Sources at Indover also told the Post that there was currently an offer from a Chinese bank to take over Indover and make use of its European Union (EU) operating license, which was considered difficult to obtain.

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