Before the near collapse in 1975 of the Pertamina state oil company in Indonesia, private banks poured billions of dollars into the firm, in part to finance the schemes of its entrepreneur president, Ibnu Sutowo, for new enterprises to add to the growing corporate pyramid.
Last week, a State Department official who was in Jakarta at the time testified that the commercial banks were advised in 1972 of the precarious situation but kept loaning anyway, sometimes in contrvention of financial objectives established by the International Monetary Fund.
Then, when Pertamina appeared unable to meet its payments in early 1975, some of the banks pressed for the Indonesian government to cover the oil company's debts.
As a result of the Jakarta government's aid, none of the private banks declared a default against Pertamina - an action that could have plunged the country into a financial crisis and possibly brought down President Suharto.
During this period, the State Department and the U.S. embassy in Jakarta became deeply involved in the travails became deeply involved in the cial concerns of the private banks, which had it in their power to unleash a major political crisis in Indonesia.
At the time, Indonesia and the Suharto government were particularly crucial in the economic and political calculations of the United States and Japan. After the 1973 embargo of the oil producers' cartel. Indonesia continued to supply petroleum to those two countries, providing an independent source of offshore oil while other sources were blocked.
That is the story that emerges from testimony of Deputy Assistant Secretary of State Erland Heginbotham and sources on the Senate Subcommittee on Foreign Economic Policy. Heginbotham testified on the Pertamina events Thursday before the subcommittee. He served in Jakarta as economic counselor from 1971 to 1975.
Heginbotham said the State Department became concerned in 1972 about evidence of very substantial borrowing by Pertamina. "Increasingly, as 1972 went by, we began to advise the banks to be very cautious and very prudent about their behaviour with regard to Pertamina," he said.
In 1973, the IMF established guidelines requiring that all loans above $150 million of from one to 15 years' duration be approved by Indonesia's Finance Ministry.
However, according to subcommittee sources, the banks used several devices to circumvent this in their haste to contunue financing Pertamina's operations. One device was loans of 360 days' duration, and another was loans of 15 1/2 years, which concerntrated repayment between the fifth and 10th years.
In response to questioning by Sen. Paul S. Sarbaines (D-Md.), Heginbotham confirmed that both techniques were used.
Sarbanes said this violated the IMF conditions, "at least in spirit."
Sen. Jacob K. Javits (R-N.Y.(said "the fact is that the banks made loans to Pertamina which were skimming the IMF (conditions) either in amount or due date or both."
The series of subcommittee hearings of which this was a part is exploring the role of international banks in U.S. foreign policy.
From the middle of the 1960s Pertamina was built into a highly successful operation by Sutowo, a dynamic businessman with direct access to Sutoharto. Under Sutowo's directorship, Indonesian oil output went from 600,000 barrels a day to double that in 1972. However, the world recession, then began to cause liquedity problems.
Pertamina's balance sheet was secret, but U.S. and foreign banks, led by Citybank of New York City, took the lead in financing Pertamina's oil expansion and its moves into new business undertakings.
In 1971 and 1972, the Republic National Bank of Dallas formed a syndicate with the Bank of America to provide Pertamina with a 360-day, $40 million loan.
Sutowo's relations with Suharto soured in 1974 when the state conglomerate held back $860 million in oil tax revenues from the government because of the cash squeeze.
In March, 1975, at a dramatic meeting in Jakarta between Sutowo and 24 foreign bankers, the Dallas bank's representatives said Pertamina was in default on the $40 million loan.
If that bank had declared an official default, the entire loan structure of the Indonesian oil industry would have collapsed, under the conglomerate's "cross default" arrangement with the private banks. The Indonesian government subsequently picked up the tab, at a cost of $2.5 billion from April, 1975, to March, 1976.