- Vincent Lingga
Jakarta | Mon, July 10 2017 | 12:37 amWithout a doubt former president Soeharto’s strong resistance to reforms required by the International Monetary Fund’s (IMF) rescue program should be blamed for Indonesia’s economic crisis that caused what analysts considered one of the most substantial cases of wealth destruction in modern history, as the rupiah melted from Rp 2,500 to the dollar in mid-1997 to Rp 17,500 in early 1998.
But Paul Blustein, a staff writer of the Washington Post, concluded in a book on the IMF’s crisis management that cascading errors and misjudgment by the IMF, the World Bank, the United States Treasury, the US Federal Reserve and the Asian Development Bank played no small part in worsening Indonesia’s economic crisis.
“The Indonesian crisis is a tale of error piled atop error ... by the Fund and Indonesians, with each side’s bad moves compounding the other’s and dragging the country’s economy to depths nobody had previously imagined possible,” Blustein notes in his book The Chastening: Inside the crisis that rocked the global financial system and humbled the IMF.
The IMF did have its fair share of blunders and misjudgment. For example, it told Asian countries to tighten fiscal policy during the crisis. Therefore, the credibility of the IMF, as a monetary crisis fighter, took a beating in Indonesia, South Korea, Thailand, Russia, Brazil and Turkey from 1997 to 1999.
Its biggest mistake was the drastic order for the Indonesian government to close 16 insolvent banks, including several owned by members of the Soeharto family, in November 1997. In the absence of any kind of deposit insurance program, the bank closures panicked depositors and prompted massive deposit withdrawals from most other private banks.
Despite the blunder, however, the IMF will still be called upon the instant a crisis in one country spreads to another. As imperfect as the IMF is, the world needs the economic equivalent of a fire brigade when markets plunge. In facing the big risk of financial contagion, the mere existence of a strong, active IMF can limit the transmission of crises from one country to another.
The global financial and capital markets have become so huge, so unruly and so panic-prone that the IMF’s resources could be overwhelmed when a crisis strikes.
One of the biggest lessons from the crisis is that the IMF should strengthen its early warning system by conducting more vigorous surveys of banks and regulatory systems in countries and by providing advice on how to reduce risks and vulnerabilities.
It should be acknowledged though that the business of detecting financial crises is sometimes extremely difficult. The set of early warning indicators on high vulnerabilities like those in Thailand, South Korea, Malaysia and Indonesia seemed initially not fully reliable. In fact, most analysts observed that none of the existing early warning models anticipated the Indonesian crisis in 1998.
The crisis showed that countries need protection from panicking creditors that is somewhat similar to the kind of protection companies get under bankruptcy laws, whereby a company can ask the bankruptcy judge to call a halt to foreclose on debtors’ assets, thereby providing it with the breathing space to negotiate new and more realistic terms for repaying its debts.
A country that runs out of hard currency and defaults or declares a moratorium on all payments risks severe punishment from the financial market, or the creditors seize the country’s assets overseas.
Here the idea of a bail-in or standoff with the full support of the IMF it to give creditors adequate time to calm down and the debtor enough time to devise a sensible plan of action under the IMF’s oversight.
This is what the IMF implemented in its second rescue program in South Korea in early 1998, but under terms of a bail whereby the fiscal and monetary authorities in the United States, Britain and Japan used moral suasion to induce the foreign creditors to stop pulling their money out of the crisis-stricken country.
The rationale is that it is in the creditors’ interests to prevent a total panic, roll over their loans and accept a rescheduled payback of their claims, because a default would be avoided if all creditors participated.
The idea is to buy time for the crisis country to resume growth, to give it a breathing space and to make sure that the creditors that are being saved from default bear a fair share of the burden involved in the rescue.
This is also called a standstill, but this solution requires a high degree of government intervention and coordination to ensure that creditors act together.
Creditors may accept the rationale that they have a collective interest in refraining from demanding immediate repayment.
A bail-in is also good from justice point of view, because taxpayers’ funds are not used to bail out the rich, but a financial stampede is prevented, like in Korea and Brazil.
But this standstill can be effective only if the debtor countries also prevent their own citizens and foreigners from moving their money abroad. This is what Malaysia did in September 1998 by imposing capital controls. Malaysia performed well one year after following that action, despite the attack by the IMF and the US.
But the problem is how to get the IMF imprint to ensure that the debtor countries really make genuine efforts to correct their fundamental economic problems and good-faith efforts to negotiate debt repayment with their creditors.
Indonesia is now in a much stronger position to weather external shocks than in the past, thanks to the series of bold reforms taken immediately after the 1997-1998 Asian financial crisis.
“We have taken great lessons from the crisis, which cost us as much as 70 percent of our gross domestic product, as the economy contracted by 13 percent in 1998 and the rupiah melted from Rp 2,400 to the US dollar in 1997 to less than Rp 16,000,” Finance Minister Sri Mulyani Indrawati noted at the 50th Asian Development Bank annual conference in Yokohama in early May.
She was referring to the massive fiscal, monetary and financial-sector reforms that transformed the central bank into an independent institution and introduced high budget discipline, fiscal decentralization and integrated financial oversight.
___________________________
The writer is senior editor at The Jakarta Post.
But Paul Blustein, a staff writer of the Washington Post, concluded in a book on the IMF’s crisis management that cascading errors and misjudgment by the IMF, the World Bank, the United States Treasury, the US Federal Reserve and the Asian Development Bank played no small part in worsening Indonesia’s economic crisis.
“The Indonesian crisis is a tale of error piled atop error ... by the Fund and Indonesians, with each side’s bad moves compounding the other’s and dragging the country’s economy to depths nobody had previously imagined possible,” Blustein notes in his book The Chastening: Inside the crisis that rocked the global financial system and humbled the IMF.
The IMF did have its fair share of blunders and misjudgment. For example, it told Asian countries to tighten fiscal policy during the crisis. Therefore, the credibility of the IMF, as a monetary crisis fighter, took a beating in Indonesia, South Korea, Thailand, Russia, Brazil and Turkey from 1997 to 1999.
Its biggest mistake was the drastic order for the Indonesian government to close 16 insolvent banks, including several owned by members of the Soeharto family, in November 1997. In the absence of any kind of deposit insurance program, the bank closures panicked depositors and prompted massive deposit withdrawals from most other private banks.
Despite the blunder, however, the IMF will still be called upon the instant a crisis in one country spreads to another. As imperfect as the IMF is, the world needs the economic equivalent of a fire brigade when markets plunge. In facing the big risk of financial contagion, the mere existence of a strong, active IMF can limit the transmission of crises from one country to another.
The global financial and capital markets have become so huge, so unruly and so panic-prone that the IMF’s resources could be overwhelmed when a crisis strikes.
One of the biggest lessons from the crisis is that the IMF should strengthen its early warning system by conducting more vigorous surveys of banks and regulatory systems in countries and by providing advice on how to reduce risks and vulnerabilities.
It should be acknowledged though that the business of detecting financial crises is sometimes extremely difficult. The set of early warning indicators on high vulnerabilities like those in Thailand, South Korea, Malaysia and Indonesia seemed initially not fully reliable. In fact, most analysts observed that none of the existing early warning models anticipated the Indonesian crisis in 1998.
The crisis showed that countries need protection from panicking creditors that is somewhat similar to the kind of protection companies get under bankruptcy laws, whereby a company can ask the bankruptcy judge to call a halt to foreclose on debtors’ assets, thereby providing it with the breathing space to negotiate new and more realistic terms for repaying its debts.
A country that runs out of hard currency and defaults or declares a moratorium on all payments risks severe punishment from the financial market, or the creditors seize the country’s assets overseas.
Here the idea of a bail-in or standoff with the full support of the IMF it to give creditors adequate time to calm down and the debtor enough time to devise a sensible plan of action under the IMF’s oversight.
This is what the IMF implemented in its second rescue program in South Korea in early 1998, but under terms of a bail whereby the fiscal and monetary authorities in the United States, Britain and Japan used moral suasion to induce the foreign creditors to stop pulling their money out of the crisis-stricken country.
The rationale is that it is in the creditors’ interests to prevent a total panic, roll over their loans and accept a rescheduled payback of their claims, because a default would be avoided if all creditors participated.
The idea is to buy time for the crisis country to resume growth, to give it a breathing space and to make sure that the creditors that are being saved from default bear a fair share of the burden involved in the rescue.
This is also called a standstill, but this solution requires a high degree of government intervention and coordination to ensure that creditors act together.
Creditors may accept the rationale that they have a collective interest in refraining from demanding immediate repayment.
A bail-in is also good from justice point of view, because taxpayers’ funds are not used to bail out the rich, but a financial stampede is prevented, like in Korea and Brazil.
But this standstill can be effective only if the debtor countries also prevent their own citizens and foreigners from moving their money abroad. This is what Malaysia did in September 1998 by imposing capital controls. Malaysia performed well one year after following that action, despite the attack by the IMF and the US.
But the problem is how to get the IMF imprint to ensure that the debtor countries really make genuine efforts to correct their fundamental economic problems and good-faith efforts to negotiate debt repayment with their creditors.
Indonesia is now in a much stronger position to weather external shocks than in the past, thanks to the series of bold reforms taken immediately after the 1997-1998 Asian financial crisis.
“We have taken great lessons from the crisis, which cost us as much as 70 percent of our gross domestic product, as the economy contracted by 13 percent in 1998 and the rupiah melted from Rp 2,400 to the US dollar in 1997 to less than Rp 16,000,” Finance Minister Sri Mulyani Indrawati noted at the 50th Asian Development Bank annual conference in Yokohama in early May.
She was referring to the massive fiscal, monetary and financial-sector reforms that transformed the central bank into an independent institution and introduced high budget discipline, fiscal decentralization and integrated financial oversight.
___________________________
The writer is senior editor at The Jakarta Post.
