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Indover bailout a 'necessary risk'

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October 25, 2008
Indonesia central bank to rescue unit in Netherlands


October 26, 2008

Indonesia central bank: Indover bailout a 'necessary risk'
Indonesia’s central bank claims a planned bailout of its ailing Netherlands-based unit, Indonesische Overzeese Bank N.V. (Indover), is considerably cheaper than risking its credibility in the eyes of foreign financial institutions, reported local daily the Jakarta Post.

"We have made calculations. If it's to Bank Indonesia's advantage, then perhaps the lowest cost is the bailout," the bank’s governor Boediono said Friday.

"But that's not what we're aiming for. There are other aims -- to prevent adverse indirect impacts to the country's economy, such as the flow of funds and cost of borrowing."

The House of Representatives' Commission XI, which oversees financial affairs, approved late Thursday the central bank’s proposal to save Indover by providing 545.6 million euros, which sources claim could be unrecoverable and considered a state loss.

The bailout will be the second for Indover, after the central bank propped it up with more than 3 trillion rupiah ($306 million) in 2001.

BI is concerned Indover's collapse could dent BI's credibility as a monetary and banking regulator, especially after a BI-issued "comfort letter" was misused by Indover to get loans from foreign creditors.

A knock to BI's credibility would have an adverse effect on the country's sovereign and financial institution ratings, as well as impact export and import financing, as foreign banks lose confidence in Indonesia's financial system.

Lower ratings would force the government and local firms into paying higher interest rates for foreign-exchange loans because of higher risks. Likewise, the cost of protecting government debts from default would also rise.

A Dutch court, on an order from the country's central bank, froze Indover's assets due to a liquidity shortage after theIndonesian central Bank, a 100 percent owner of the bank, failed to provide liquidity to support Indover as it succumbed to the global financial crisis.

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