Andrew Marshall, Jakarta – Indonesia is in the grip of an economic paralysis that cannot be broken until its debt-ridden, capital-starved companies can escape the straitjacket of their ruinous foreign liabilities.

Private-sector debt is estimated at $80 billion. Scores of firms have stopped servicing their debt and some are refusing even to talk to creditors. With their debts unresolved, companies are unable to gain access to fresh funds and many are unable to operate. Working capital and inventories are deteriorating fast.

A foreign adviser working closely with Indonesia's government on debt restructuring says he estimates the cost of this deterioration at $7 million a day. He says around 60 percent of large Indonesian companies are technically bankrupt.

If the stalemate between debtors and creditors persists, much of Indonesia's corporate sector will be unable to resume functioning and a broad recovery can never take root.

There is also the risk of fresh unrest as paralysed companies lay off workers, adding to Indonesia's mounting unemployment. Some 20 million people are estimated to have no work while millions more have virtually none.

Furthermore, the longer the impasse continues the more damaging will be the deterioration in capital suffered by Indonesian firms, and the harder Indonesia's eventual recovery.

To combat the problem the government has launched the Jakarta Initiative, which offers a set of suggested principles for voluntary debt restructuring deals between creditors and debtors as well as help in facilitating negotiations.

A source at the Jakarta Initiative says more than 110 companies have enrolled so far, with foreign debts totalling $13.3 billion, around 19 percent of all corporate external debt.

But enrolling is just the first step, and deals so far have been few. The source said nine deals had been agreed in principle and a further six standstill agreements had been reached.

A few blue chips have reported progress. Bakrie & Brothers says it is close to a deal that will give creditors 80 percent of a holding company grouping its best-performing assets in exchange for writing off Bakrie's billion-dollar foreign debt. But most companies remain stuck in a stand-off with creditors. The following is a summary of the main obstacles to resolving the corporate sector debt problem.

Bankruptcy law

Indonesia's new bankruptcy law, introduced last August, is widely regarded as a farce.

Hardly any companies have been declared bankrupt. Many bankruptcy suits have been thrown out on dubious legal grounds. Critics say Indonesian judges have not yet mastered the law.

Few creditors wish to push companies into bankruptcy – they would only get back a fraction of their loans.

But analysts say an efficient bankruptcy law is an invaluable bargaining chip for creditors to force recalcitrant debtors to the table and try to strike a deal. Without it, there is little creditors can do to break the debt stalemate.

Debtor attitudes

Debt-equity swaps are regarded as the most promising blueprint for restructuring. Creditors would be given an equity stake in debtor companies in exchange for the corporate debt they hold. Bakrie's proposed deal follows this model.

But few of the tycoons who own Indonesia's debt-ridden conglomerates are willing to give up control to creditors. Analysts say many refuse to face reality and are avoiding making a deal, in the hope that an alternative escape route may emerge.

Some debtors have even suggested that Indonesia's economic crisis is an act of God which should allow them to declare force majeure and avoid honouring their contracts with creditors.

Uncertainty

Uncertainty hangs over Indonesia's political and economic landscape. Parliamentary elections are scheduled for June, followed by the choice of president in November. Crime and unrest have flared across the troubled country.

The next six months could see Indonesia begin a tentative recovery if it gets through the elections unscathed, or collapse into fresh chaos and political uncertainty.

The climate of uncertainty makes debt agreements even harder, analysts say.

Many debtors and creditors would rather wait until Indonesia's future becomes clearer before striking a deal.

Creditor attitudes

Analysts say most deals will have to involve substantial debt forgiveness. But creditors remain reluctant to agree. Sources in the Jakarta Initiative team say that of the three main groups of creditor banks – US, European and Japanese – it is the Japanese who are proving the most reluctant to make concessions to try to strike deals.

Many would prefer to wait and hope Indonesia's situation improves than make deals now that involve booking large losses.

Individual creditors are wary of being seen to be the first to give in and offer debt forgiveness. They also fear setting a precedent – if they offer forgiveness to one firm other indebted companies could begin to clamour for a similar deal.

Popular backlash

The debt restructuring process could also be derailed by a popular, nationalistic backlash which could be exploited by indebted firms and politicians fighting for support in Indonesia's increasingly democratic political climate.

If foreign firms are seen to be taking control of Indonesian companies, and then breaking them up or laying off workers, resentment could build up quickly. Foreign banks successfully pushing domestic firms into bankruptcy could also stir up anger.

Given Indonesia's uncertain political climate, creditors face the risk that the debt restructuring process could spark unrest, or could be halted by a new, more nationalistic parliament.

The sale of a government stake in state-owned cement firm Semen Gresik illustrates the power of nationalistic economic interests in Indonesia.

The government signed a deal with Mexico's Cemex to allow it to take 51 percent of Gresik. The decision was greeted by mass protests by Gresik workers and attacks from several politicians inside and outside the government. In the end, the government backed down. Cemex was allowed 20 percent.