U.S. and foreign banks have reached a debt restructuring agreement with Indonesia, a move observers said could halt the Southeast Asian country's slide into economic chaos.
Robert Strong, chief credit officer at Chase Manhattan Corp. and a co- chairman of the 13-member bank steering committee that negotiated the agreement, termed the pact "a large step forward" for the Indonesian economy.
"This will give banks and Indonesian corporations a tool to help facilitate workouts, as well as help improve the flow of trade finance, liquidity, and the overall financial structure of the banking environment," said Mr. Strong, during a phone interview from Frankfurt, the site of the negotiations.
The restructuring, covering about $74 billion of Indonesian borrowings, is the first with a financially troubled Asian country since a February agreement to extend short-term South Korean interbank borrowings.
The steering committee said the agreement allows Indonesian corporations an eight-year extension on their borrowings, including a three-year grace period during which they will not be required to repay any principal.
As part of the agreement, Indonesia will set up a government agency to supply foreign exchange to Indonesian corporations to help service their debts.
Bankers and analysts predicted Thursday's agreement would help restore economic stability to Indonesia, which has been wracked by rioting and political disorder up until last month's resignation of President Suharto and his replacement by B.J. Habibie.
Severe rioting last month also forced U.S. and other foreign banks to withdraw employees and curtail operations.
"I truly believe the worst is over in Indonesia," said Ignacio E. Sosa, managing director and group head for emerging markets at BancBoston Securities Inc., a unit of BankBoston Corp.
Bankers and analysts asserted that President Suharto's resignation, combined with the severity of the crisis, had helped pave the way for a relatively quick agreement with foreign banks.
"The political situation did argue for a quick settlement," said Eugene O'Kelly, national director for banking and financial services at KPMG Peat Marwick in New York.
The agreement is far broader than the February agreement between banks and South Korea, which only covered around $25 billion of short-term borrowings by Korean banks and left the bigger problem of Korean corporate borrowings unresolved.
Mr. Sosa predicted that the broad-based agreement could open the door to a large number of debt restructuring transactions between individual corporations and banks, creating a secondary market for trading in Indonesian debt, as well as opportunities for swapping loans into equity.
"It looks almost exactly like what happened in Latin America," Mr. Sosa added, in a reference to debt agreements between banks and several Latin countries earlier this decade.
The agreement will take some time to carry out because Indonesian companies and creditor banks will have to work out restructurings on a loan by loan basis.
However, analysts also noted that Indonesia has backtracked on other financial agreements. They added that it remains far from clear whether this week's debt restructuring deal will work.
"This is promising news but we want to see how it develops," said Raphael Soifer, a banking analyst at Brown Brothers, Harriman & Co. "The history of the Indonesia debt situation has been one step forward and two steps back."
Under a second part of the agreement, U.S. and other foreign bank creditors have agreed to exchange all short-term, nontrade-related borrowings by Indonesia commercial banks due through March 31, 1999, for new loans of up to four years bearing interest rates of 2.75, 3, 3.25, and 3.5 percentage points over the London interbank offered rate.
Lastly, foreign creditor banks have agreed to extend their outstanding trade-related credits to Indonesian banks for up to one year. Indonesia's central bank has agreed to guarantee repayment of all such trade-related borrowings.
Indonesian corporations owe foreign banks around $60 billion, and Indonesian commercial banks owe an estimated $9.2 billion. Banking sources said Indonesian companies also owe $4.2 billion to $4.4 billion in short- term trade-related borrowings. The figures exclude Indonesian government borrowings.
Citicorp and BankAmerica Corp. were the other two U.S. members of the 13-bank committee, which also included ABN Amro, Banque Nationale de Paris, HSBC Holdings, Korean Development Bank, Overseas Chinese Banking Corp., Sanwa Bank, Standard Chartered Bank, and Sumitomo Bank Ltd.