By Paul Blustein
Washington Post Foreign Service
Tuesday, January 27, 1998; Page D03

JAKARTA, Indonesia, Jan. 27 (Tuesday)—Seeking to stave off a collapse of its financial system, Indonesia today announced a sweeping plan that would guarantee all obligations of Indonesian banks and establish a new body to dispose of problem-ridden banks and their massive bad loans.

At the same time, Radius Prawiro, the special adviser to President Suharto on the nation's $140 billion foreign debt, issued a statement saying that many Indonesian companies will need a "temporary pause" in servicing their foreign loans until arrangements can be made with their creditors to reschedule their debt payments.

That announcement stopped short of a formal debt moratorium -- which could possibly ruin Indonesia's international credit standing for years to come -- because Prawiro said that "corporations able to service their debts must continue to do so." But the statement marked the most explicit official statement to date by Indonesia that the nation's companies will need some forbearance by creditors, and Prawiro disclosed that "steering committees" are being established to handle negotiations between foreign lenders and Indonesian debtors.

The moves are the latest in a series of efforts by Indonesia and the International Monetary Fund to reverse a flight of capital from the country that has caused the Indonesian rupiah to plunge and has virtually halted the flow of credit needed to fund normal business activities.

The country's crisis has not abated -- indeed, it has worsened -- since the Jan. 15 announcement of a package of economic reforms, amid much fanfare, by Suharto and IMF Managing Director Michel Camdessus. The rupiah has fallen even further against the U.S. dollar; Indonesian banks are hemorrhaging deposits; and foreign banks are balking at accepting letters of credit issued by Indonesian banks, raising the danger that the country won't be able to finance the importing of goods that it needs to keep its economy functioning and its people fed.

At a news conference this morning, Bijan Aghevli, the chief of the IMF's mission in Jakarta, acknowledged that "the economic situation has continued to deteriorate over the past few weeks."

But, he said, "the authorities have already made considerable and rapid progress" on a number of fronts, including ending inefficient monopolies, addressing the problems of the banking sector and starting talks on rescheduling the foreign debt. "For this reason," Aghevli said, "I remain confident that if this program is implemented with the commitment and vigor that we have seen over the past two weeks, Indonesia should soon begin to overcome its economic crisis."

The extraordinarily broad nature of the government guarantee of bank obligations issued today reflects the dire straits into which the country has fallen. Finance Minister Mar'ie Muhammad frankly acknowledged at the news conference that the country's credit system is on the verge of widespread failure, saying, "Even domestic banks have become reluctant to lend to each other."

Accordingly, he announced, the government is promising all depositors and creditors of Indonesian banks that, "should any bank encounter difficulty in making payments, Bank Indonesia [the country's central bank], acting on behalf of the government, will immediately step in to make sure that these payments can be made.

"This means that the public can now rest assured: their bank deposits are now completely safe and sound," Mar'ie said, adding that only shareholders and holders of subordinated debt would not be covered by the guarantee.

Whether the promise restores confidence in the system remains to be seen. Officials at the news conference estimated that approximately 300 trillion rupiah -- which is equivalent to more than $30 billion at current exchange rates -- would be covered by the guarantee. One reason for the lack of confidence that investors have in Indonesia is the fear that rising unemployment and inflation will spark large-scale social unrest and political instability.

The move also runs the danger of drawing criticism that it is tantamount to a bailout of wealthy depositors who should have been aware of the risks they were taking with their money. But the authorities evidently decided they had little choice but to take radical measures, given the acute nature of the crisis.

The government said that the guarantee would eventually give way to a more formal deposit insurance system once the details could be worked out. And the authorities are also setting up a body -- similar in some respects to the Resolution Trust Corp., which was established to cope with the U.S. savings-and-loan crisis -- to restructure troubled banks by forcing them to seek new capital and dispose of bad loans.

The new body, called the Indonesian Bank Restructuring Agency, or IBRA, will assess the condition of all of the nation's banks and give the owners the chance to invest more capital so that their financial cushion will be adequate to cover losses. "In the event that recapitalization does not take place and a bank fails an IBRA-commissioned review, IBRA will assume full supervisory authority over it," a government statement said.

Asked whether this means such banks would be closed, officials gave vague answers, apparently wary of deepening the public's unease about the safety of their deposits.

In a bid to attract badly needed foreign capital into the banking system, the government said it also is eliminating "all restrictions of foreign ownership of Indonesian banks." That move raises the possibility that foreign banks might be able to buy into the system at very cheap prices. But many foreign financial institutions are leery of plunging into Indonesia in a major way because of the lack of well-defined bankruptcy laws.