The central bank claims a planned bailout of its ailing Netherlands-based unit, Indonesische Overzeese Bank N.V. (Indover), is considerably cheaper than risking its credibility in the eyes of foreign financial institutions.
"We have made calculations. If it's to Bank Indonesia's advantage, then perhaps the lowest cost is the bailout," BI governor Boediono said Friday.
"But that's not what we're aiming for. There are other aims -- to prevent adverse indirect impacts to the country's economy, such as the flow of funds and cost of borrowing."
The House of Representatives' Commission XI, which oversees financial affairs, approved late Thursday BI's proposal to save Indover by providing 545.6 million euros, which sources claim could be unrecoverable and considered a state loss.
The bailout will be the second for Indover, after BI propped it up with more than Rp 3 trillion (US$306 million) in 2001.
BI is concerned Indover's collapse could dent BI's credibility as a monetary and banking regulator, especially after a BI-issued "comfort letter" was misused by Indover to get loans from foreign creditors.
A knock to BI's credibility would have an adverse effect on the country's sovereign and financial institution ratings, as well as impact export and import financing, as foreign banks 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.
A Dutch court, on an order from the country's central bank, froze Indover's assets due to a liquidity shortage after BI, a 100 percent owner of the bank, failed to provide liquidity to support Indover as it succumbed to the global financial crisis.
BI claimed 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 BI with responsibilities for the bank beyond that period.
Also on Friday, Vice President Jusuf Kalla urged BI and law enforcers to investigate officials involved in the Indover troubles before bailing out the Amsterdam-based bank.
"We will help Indover meet its obligations as per regulations. But BI must take responsibility for investigating those involved in creating this mess," he said.
Sources say BI would not have spared Indover if not for the comfort letter, used to assure creditors that Indover would not be short-lived under BI's ownership.
"We are conducting an audit on the case. We have told the House about the divestment problems and the comfort letter. It will all be probed thoroughly," said Boediono, who took the helm at BI in May.
Sources say Boediono put himself at risk of prosecution because of the bailout, which could potentially lead to state losses.
"Boediono is cleaning up the mess made by certain BI officials who had long benefited through Indover. If the bank was sold a long time ago, this problem would not have come up," said a source at a foreign bank.
Attorney General Hendarman Supandji said prosecutors would investigate Indover for any illegal activities leading to past and present problems at the bank.
Adverse impact from Indover woes
- There could be an indirect negative perception from the domestic and international financial market players about the credibility of Bank Indonesia as the shareholder and also as the monetary authority and banking supervisor.
- A possibility of a cut in the Indonesian sovereign and financial institution ratings.
- An increase in the premium of credit default swap for every Indonesian foreign loan.
- A possible cross default due to market perception that Indover's failure is BI's fault.
- Influencing the availability of funds to businesses, and increasing the cost for trade financing, already on the rise.
- An early redemption, a halting of roll-over facilities, and a possible limit in Indonesian foreign loan facilities.
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