Special Report: Indover bailout: Pricey cleanup for BI mess

Mon, 10/27/2008 11:35 AM  |  Headlines

Bank Indonesia (BI) is paying a high price to maintain its credibility after its Netherlands-based Indover Bank subsidiary defaulted on its debt payments. Following a decision taken in closed-door meetings and with a low level of transparency, the BI proposal to bail out Indover, eventually calling upon massive taxpayer funds, has now been approved by lawmakers. The Jakarta Post's Aditya Suharmoko and Rendi A. Witular present a special report on the Indover mess. Here are the stories.

During the last 10 years, at least, BI's Netherlands-based Indonesische Overzeese Bank N.V. (Indover) subsidiary has been renowned mainly for hatching up a series of hostages to fortune and large scale losses, rather than making any economic gains for Indonesia. This was a disaster waiting to happen.

The recent 545.6 million euros bailout plan for ailing Indover, half-heartedly approved by lawmakers, is the latest cost taxpayers have had to bear to keep the bank afloat, despite the forecast that the injected money will probably evaporate and have to be considered as a state loss.

For BI, however, this is the cheapest way of salvaging the Amsterdam-based bank come what may to maintain BI's credibility in the eyes of foreign financial institutions, fearing an Indover collapse could be understood as a sovereign default by BI.

The Indover mess has actually stemmed from the protracted mismanagement of the bank by none other than the central bank senior officials who have had vested interests in it.

Despite being required by the central bank law since 1999 to immediately sell Indover before the Jan. 15, 2009 deadline, BI refused to do so until the Indover bubble burst and forced the newly elected BI governor Boediono to clean up the mess.

"It's clearly catastrophic mismanagement by BI. The bailout is the price paid to fix the problem," said M. Ikhsan Modjo, an economist of the Institute for Development of Economics and Finance (Indef).

The bailout will be the second for Indover, after BI propped it up with more than Rp 3 trillion (US$306 million) in pledged deposits in 1998 to help cover soaring bad debts.

Some of the debts include those owned by some of President Susilo Bambang Yudhoyono's Cabinet members, who were at that time already top businessmen.

BI officials had already argued then that an Indover collapse would hurt BI's credibility.

Indover became more healthy in 2003 after BI formed a vehicle firm Indo Plus BV to take over the bank's bad debts, which according to an audit by the Supreme Audit Agency (BPK) could have led to BI losing the deposits then pledged.

After the rescue, however, BI still refused to let Indover go, despite numerous parties at that time vying to take over the bank, which was a wholesale bank set up with the noble purpose of helping Indonesian exporters to seek European buyers.

According to the BPK audit, Indover assistance to Indonesian exporters merely accounted for 6.1 percent of loan placements in 2006, raising questions over its degree of seriousness in fulfilling its mission to become "the banking bridge between Asia and Europe".

"There's nothing in it for the Indonesian economy. Why is BI still refusing to sell the bank? This should be thoroughly investigated," said Andi Rachmat, a member of the House of Representatives' commission XI for financial affairs.

"If the bank had been sold a long time ago, this problem would not have come up. And we would not now be risking losing massive funds to keep Indover's head above the water," he said.

Based on the BPK report, BI has spent Rp 109.6 billion ($11.18 million) paying divestment consultants since 1996, expenditure which has proved to be quite fruitless.

A Netherlands court, on an order from the country's central bank, froze Indover's assets due to a liquidity shortage of US$92 million after BI, a 100 percent owner of the bank, recently failed to support Indover as it succumbed to the global financial crisis.

BI claimed earlier that an amendment to the central bank law forbade it from operating any business firm as of January next year, and said help for Indover would have burdened it with responsibilities for the bank beyond that period.

The BI's bailout, however, will carry a risk as well, especially for Boediono, who has earned a reputation as "Mr. Clean".

This is because the recent approval by the House commission XI contains legal loopholes which can legally harm Boediono, especially if there is a potential for a state loss.

According to commission member Dradjat Wibowo, a House plenary session is needed for BI to be able to unload the bailout fund from its strategic reserves because the impact is so huge.

Dradjat said the commission's approval was legally not for a bailout approval but for "support in settling the Indover problem".

"A bailout approval should be explicitly referred to in the commission's recommendation before being approved by the plenary session. To come up with that, the commission has to have a vote."

"But all the members were afraid at that time to vote because the bailout will potentially become a state loss, in which case somebody else should be responsible for it. Another thing is that the Indover case involves a potential criminal act," said Dradjat.

BI is concerned Indover's collapse could dent BI's credibility as a monetary and banking regulatory authority, especially after BI issued a "comfort letter" to help assure Indover creditors that Indover would not remain under BI ownership for only a short time.

A blow against BI's credibility would have an adverse effect on the country's sovereign and financial institution ratings, as well as impacting on export and import financing, as foreign banks could lose confidence in Indonesia's financial system.

Lower ratings would force the government and local firms into paying higher interest rates for foreign-exchange loans because of higher risks. Likewise, the cost of protecting government debts from default would also rise.

However, Ikhsan Modjo disputed these arguments, arguing foreign financial institutions would not jump into concluding that an Indover default would be indicative of the entire country's inability to service its debts.

Indeed, as reported by Bloomberg recently, Fitch Ratings believe that Indonesia's credit rating would not be affected should Indover collapse.

"It's not the debt of the sovereign, so in this instance we would not outright consider it as a sovereign debt default," said Ngiam Ai Ling, a Fitch director of sovereign ratings as quoted by Bloomber.

But still "they have to find a resolution."

Indonesia's debt is rated BB by Fitch, two levels below investment grade.

After rescuing Indover through the bailout, BI is planning to immediately sell the bank, or to dissolve it should there be no buyers interested, according to a document obtained from a closed-door meeting on Thursday between the commission, BI and the Finance Ministry.

BI has also suspended BI officials who were involved in dealing with Indover in a bid to avoid conflict of interest and to uphold good governance; these include BI deputy governor Budi Mulya who has been overseeing Indover since his election late last year.

Chronology of Indover woes

Sept. 3: Indover contacts BI requesting standby funds to face the possibility of fund redemption from the money market. BI fails to meet the request, ordering Indover to get the funds from the market. Indover succeeds in doing so, but at a very high interest rate.

Oct. 6: At around 18.30 Jakarta time, Indover informs BI it will ask for liquidity support from the Dutch central bank (DNB) through emergency liquidity assistance. The application to get the loan requires an open-ended guarantee from the shareholders. Believing the guarantee to have its own consequences of unlimited financial responsibilities, BI turns down the request.

On the same day, Indover management and DNB officials arrive in a Dutch court to explain the situation at the bank, which had just defaulted on US$92 million that day.

Oct. 7: The court declares Indover in emergency status, appointing two curators to take over its management and freezing its assets and liabilities.

Oct. 12: The curators request BI provide the emergency facility of 250 million euros needed to pay repo to the DNB and other creditors.

Oct. 14: BI turns down the request because according to the central bank law, it is not allowed to give a loan to other parties, except to domestic banks in the form of short-term funding, or a capital injection with the approval of the House of Representatives.

Oct. 15 - Oct. 21: BI and the government team up to salvage Indover.

Oct. 22: The House's commission XI for financial affairs hears from Indover's management, BI Governor Boediono and Finance Minister Sri Mulyani to seek a settlement that will keep the bank intact. All the hearings are held behind closed doors.

Oct. 23: The House's commission supports BI and government to take measures in salvaging Indover.

Source: BI and The Jakarta Post file

 

What 545.6m euro (around Rp 7t) means for Indonesians in terms of what it is worth, or what it could buy:

1. Cash transfer assistance (BLT) for 9.5 million households, half of the total 19.1 million poor households, to cope with the impact of May's fuel price rise.

2. The yearly remittances of 50,000 Indonesian migrant workers in Hongkong.

3. The construction of 41,176 units of one-level elementary schools with six classes outside Jakarta.

4. The education subsidy for 20.8 million elementary and junior high school students.

5. The amount is also equal to 35 percent more for covering free medication for all poor families having the poverty declaration card (Gakin) usable in the lowest class of public hospitals.

6. Some 83 percent of the Agriculture Ministry budget for 2009.

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