Darren Mcdermott, Singapore – The Indonesian rupiah's renewed plunge is undermining a week-old debt-restructuring agreement that already was struggling to win support.

Announced last week in Frankfurt, the agreement outlines a way of restructuring Indonesia's $80 billion in foreign private debt, thus offering breathing room to the nation's cash-strapped companies and its shaky foreign-exchange market.

The pact, signed by representatives of the Indonesian government and 13 international banks, offers a voluntary program to debt-laden companies in which their obligations will be extended by eight years and they receive access to dollars at a locked-in rate. In return, they must resume making loan payments, which almost all Indonesian companies have ceased doing.

But some bankers in Asia who didn't sit on the committee are angry that they still haven't been briefed on the plan. Worse, they think it isn't going to work. Though the program clearly gives creditors the power to veto companies that have money to make payments now from entering the program, they fear that all companies now will argue they need the three-year grace period and five-year extension – and may threaten not to pay anything at all if they don't get their way.

Liquidate, not resuscitate

"We had a borrower we were trying to persuade to start paying in September because he will have cash flow then," says a Singapore-based banker. "Now he's going to say, 'No, now we don't have to start paying you.' "

It also isn't clear how the plan applies to the substantial number of companies that simply aren't going to survive the crisis. "Even if we give them some breathing room, many of our borrowers will never be able to repay. It's a question of whether we can liquidate them, not resuscitate them," says another banker in Singapore.

Bankers who brokered the deal insist that banks have final say over whether companies are allowed in the program. "If the banks say no, then no rescheduling takes place," says one banker involved in the negotiations. But he concedes that while a bankruptcy system for Indonesia has been promised, it isn't yet in place, and until it is, there is little bankers can do with borrowers who can't or won't pay.

As for information on the pact, this banker says the negotiating committee's three lead banks – Chase Manhattan, Deutsche Bank and Bank of Tokyo-Mitsubishi – are spreading the word from their home offices directly to other banks' home offices. "The dissemination process is taking place now," he says.

A 'vicious circle'

The plan also depends on Indonesia reviving its beleaguered banking system – and fast. With access to working capital now completely dried up, companies are keeping any income they have for use in running factories, paying employees and purchasing raw materials and other essentials, bankers say. "To break this vicious circle you have to keep trade financing coming in, so that an importer once again has 180-day credit instead of having to pay cash for everything," says the banker who worked on the deal.

The accord calls for international banks to hold in place the trade-financing levels, which totaled about $4 billion as of the end of April, this banker says. But equally essential will be the Indonesians' own moves to clean up their banking system, he says.

Meanwhile, the falling rupiah this week is starting to have the opposite effect from what bankers feared – companies are afraid of locking in an unfavorable dollar-rupiah exchange rate. As it stands, the plan will provide them dollars in exchange for rupiah for the next eight years at a rate derived from the rupiah's strongest levels in the 11 months after the company signs up for the program.

Uncertainty ahead

But with the currency plunging this week and political and economic uncertainty ahead, some companies are calculating they will do better by simply not paying anything until they are able to. The rupiah ended Asian trading Friday around 14,000 to the dollar, weakening from about 11,500 when the deal was signed. Several companies have said as much in recent days, including the automotive giant PT Astra International, which has $2 billion in foreign borrowings.

"Who wants to get the rupiah at nearly 14,000 to the dollar?" concedes a government adviser, speaking on condition of anonymity. "They'd rather just not pay."

Here again, the plan's poor public-relations efforts appear to be undermining it. According to the banker who helped negotiate it, the pact includes an exchange-rate readjustment clause under which, if the rupiah has strengthened after a company has been in the program for two years, it can adjust its rate to reflect that move. Yet few companies appear to know about this.

"I just had someone in my office, an Indonesian company, asking what they should do about this program," said a Jakarta-based banker. "I didn't know what to tell them. Nobody knows anything. If you make an agreement like that you would want as many people as possible to know about it, as many people as possible to support it."