RI stays alert, despite Spain rescue package

Indonesian share prices and the rupiah followed the price rally in global financial markets on Monday after the signing of a US$125 billion bailout package for Spain over the weekend eased concerns of a worsening crisis in the eurozone.

The Jakarta Composite Index (JCI) gained 40.89 points to close at 3,866.21 in active trading, indicating signs of recovery in the local stock market. The rupiah also showed signs of strength during the day, rising 0.7 percent to 9,408 against the US dollar.

Mandiri securities analyst Aldian Taloputra said that with the bailout package, investors gained more confidence that fears about a possible escalation in the financial crisis in Europe could be cushioned.

“With this bailout, market players see glimmers of hope that the situation will not be as severe as they initially expected,” Aldian said.

“The market conditions will be more conducive and stable now that Spanish banks will receive a bailout,” Aldian said.

As in other countries, the financial market in Indonesia has also been under severe pressure since early last month on fears over the worsening of the European crisis. JCI, the main price barometer on the Indonesian Stock Exchange (IDX), plunged to 3,654.6 on June 4, 9 percent lower than its peak of 4,021 on May 2. The negative sentiment also hit the rupiah, which fell to a 31-month low of Rp 9,643 per US dollar on May 31.

Other analysts, however, warned that the rescue package for Spain might be short-lived as investors turn their focus to Greek elections on Sunday that could result in the exit of Athens from the currency block.

Despite the positive trend showed in the markets following the Spanish bank bailout, Finance Minister Agus Martowardojo said that Indonesia would still need to maintain its guard against the crisis for the long term.

“Politically speaking, there are many European countries that have not yet shown a strong commitment to mitigate the crisis. We need to stay alert,” Agus told reporters at his office Monday.

Aldian, in similar tone as Agus, said that eventually, the solution to the crisis would depend on European leaders’ willingness to take on politically unpopular policies to mitigate the crisis for the long term.

“When the discourse is on how to handle crisis, there are only two medications. First, by increasing the state’s revenue and secondly, by tightening spending. Both of these are politically unpopular,” he said.

Another factor that could worsen the crisis is Greece’s decision on whether it will stay in the eurozone currency group or not. The decision will be made next Sunday, during which Greece will go to the polls with a choice between pro-bailout leaders and those who reject it, potentially at the cost of Greece’s future in the euro. Standard Chartered economist Fauzi Ichsan had said that if Greece decided to walk out of the eurozone, the crisis would severely impact the EU economy and would then create a chain reaction that could affect the global economy.