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Commentary: Blanket guarantee
protects not the rich,
but the rupiah

“If you had Rp 25 billion (US$2.5 million) in a bank, what would you do with it?” asked a businessman during a chat at a private business gathering in Jakarta.

Because the government guarantees bank savings of up to Rp 2 billion, the logical answer would be to spread the money to more banks. But to qualify for the guarantee, you would have to spread it over 12 banks.

That’s when you have Rp 25 billion. In reality, there are several people — perhaps more — who have more than Rp 100 billion each at their disposal. What would they do? Spread it over all banks here? How troublesome.

The businessman then argued the logical consequence would be to place it in Singapore, which provides a blanket guarantee for all bank savings. Not only is it safer there, but the Singapore dollar is also perceived as a more stable currency than the rupiah.

The Rp 2 billion guarantee — a jump from Rp 100 million earlier — is indeed a big move that we need to appreciate, but it is no more relevant now when our closest neighbors — Singapore, Malaysia, Thailand and Hong Kong — already provide a blanket guarantee.  This situation puts us in a more vulnerable position.

It is true the Rp 2 billion guarantee covers 99.92 percent of depositors, but most people seem to forget that the remaining 0.08 percent accounts for nearly 40 percent of all third party funds in our banking sector, which totals around Rp 1,520 trillion. It’s indeed stark evidence of the wealth disparity in our country, but that’s the reality we have to face now.

Don’t forget there is Rp 600 trillion in our banking system not covered by the government’s guarantee, and it is very prone to capital flights. Money doesn’t recognize nationality and it flows to safer places offering similar returns.

The situation is especially worrying now following the global financial crisis. Even though our banking system is better than in the late 1990s when we experienced our own financial crisis, our banks are in no better condition than our neighbors’ that have a blanket guarantee. Any small indication of problems arising from our banks is enough to cause jitters among the rich.
Just imagine if 30 percent of that unprotected money fled our country because of jitters: What would happen would be strong pressure on the rupiah as those fleeing would convert their Rp 200 trillion in savings to foreign currencies.

When that happens, the choice for the central bank is to defend the rupiah — but erode its already dwindling foreign exchange reserves, which have fallen from more than US$60 billion a few months back to $51 billion now — or to let the rupiah be exposed to massive sell-offs, which practically means a free fall. In the latter case, it will penalize all of us.

Although the danger of not providing a blanket guarantee is real, our politicians in the government are still divided over this issue. Apparently our impeccable Finance Minister Sri Mulyani Indrawati supports the blanket guarantee, as does our careful but tactful central bank governor Boediono. But Vice President Jusuf Kalla is against it, arguing that a blanket guarantee could pose moral hazards and more importantly, the government does not want to protect the rich.

But providing a blanket guarantee is not about protecting the rich — they know how to protect themselves — but preventing money in our banking system from flowing out and thus protecting all of us from a possible falling rupiah.

True, the blanket guarantee could create moral hazards. But we also believe there are ways to prevent bankers from abusing their access to money when something really happens. We cannot stop doing something because we are afraid people will abuse it. We have to strengthen the safeguards, and if necessary involve our credible Corruption Eradication Commission in this important matter.

After all, providing a guarantee costs nothing to the government unless something really does happen to our banks. If our economy is OK and our banks are really strong, then there’s no cost to us taxpayers.

Providing a blanket guarantee is like in our proverb Sedia payung sebelum hujan (prevention is always better). Before anything bad happens, we will have already given some level of certainty to those rich people and hopefully they will keep their money in the country so the rupiah may become stronger, or at the least, would not weaken further.

 

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