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Indonesia Bailout Criticized Following Continued Plunge

By Paul Blustein
and Sandra Sugawara
The Washington Post

The $43 billion international rescue plan for Indonesia's economy is in danger of coming unstuck, government officials and private analysts warned Tuesday, as the Asian nation's currency plunged to a record low and its government announced a budget that failed to meet targets set by creditors.

Indonesia's troubles are the latest sign that Asia's financial crisis is worsening despite more than $100 billion in international bailouts that have been mustered by the International Monetary Fund for several of the region's once-prosperous economies.

The currencies of Indonesia, Thailand, Malaysia and the Philippines have hit new lows on each trading day of the new year. And Tuesday the Indonesian rupiah - which lost 56 percent of its value against the dollar last year - fell the furthest, dropping 15 percent.

The relentless turmoil in Asian markets is intensifying worries that the IMF-led rescues are failing to reverse the region's slide toward economic and political chaos. South Korea's $57 billion bailout, the biggest ever, had to be strengthened two weeks ago because capital was continuing to flee the country, forcing the IMF and the world's richest countries to speed loans to Seoul ahead of schedule. The free-fall of the rupiah is raising the prospect that Indonesia's rescue package will also have to be supplemented or altered in some significant way.

IMF officials acknowledged Tuesday that the Indonesian situation is becoming particularly worrisome, but they said the fault lies mainly with the Jakarta regime for failing to follow through on pledges to restructure the nation's economy that were made in exchange for the bailout.

Clinton administration officials, who have been heavily involved in designing the IMF packages, hold similar views, although they refused to be quoted Tuesday.

"We would like to see the senior leadership in Indonesia stand up and be counted on the reforms," a senior IMF official said. "I think the markets are asking themselves the question of just how much the senior Indonesian leadership is committed to this program, and particularly to the major reform measures that affect the family" of Indonesian President Suharto. A number of Suharto's relatives own or control giant companies that would lose lucrative subsidies and benefits if the IMF's prescriptions were followed faithfully.

One possible outcome is that the IMF, which disbursed $3 billion in loans to Indonesia in November, will refuse to approve a second installment of $3 billion that is scheduled to be advanced in mid-March following a review of Indonesia's performance.

Government sources stressed that a decision is far from being made, but the senior IMF official said, "It will be a key moment for all of us - not just the Indonesians, but for all of us trying to think through how to deal with this situation successfully."

Analysts said the budget unveiled Tuesday by Suharto made a suspension of IMF assistance much more likely, because Jakarta was failing to fulfill promises to run a budget surplus and was balking at cutting spending on politically popular items that the IMF views as inefficient, such as gasoline subsidies.

IMF and U.S. officials are anxious to restore stability in Indonesia, partly because of the impact an economic collapse there would have on the economies of its neighbors and partly because the archipelago has a history of bloody conflict between the Muslim majority and the small ethnic Chinese minority that controls the bulk of the wealth.

"Indonesia could move from a financial crisis to a political crisis to an ethnic pogrom," said David Hale, an economist at Zurich Kemper Investments in Chicago. "This thing is still very serious."

A collapse of the Indonesian rescue wouldn't necessarily raise the same risks of an international financial crisis that IMF and U.S. officials have feared in the South Korean case.

Indonesia holds substantial currency reserves, according to IMF officials, and much of the $60 billion that it owes to major foreign financial institutions is owed by private conglomerates and companies rather than banks. Many of them have reportedly gone into virtual default to foreign creditors because, as the rupiah tumbles, they become less able to pay debts owed in dollars. But pursuing bankruptcy claims in the nation's courts is notoriously difficult, so many lenders have refrained from pressing the matter, at least for the time being.