Reuters, Tokyo – Indonesia faces a bank-sector meltdown and a political break-up that could trigger a financial crisis, according to a senior official of the Japan Bank for International Co-operation (JBIC).

Takuma Hatano said Japan, Indonesia's biggest creditor, supported the three-year programme of financial recovery that Jakarta was drawing up with the International Monetary Fund.

"I think Indonesia can basically implement that programme and obtain a soft landing, but still the political risk is very hard to anticipate," said Mr Hatano, JBIC's executive director for Asia and Oceania.

He singled out the risk of the political disintegration of the sprawling archipelago, engulfed by separatist and religious violence.

"Is there any country which has the risk of a [political] split that can implement a very harsh IMF programme over three years? Nobody knows," Mr Hatano said. JBIC is owed more than US$33 billion by Indonesia.

Mr Hatano said the worst case would be if the government's revenue-sharing arrangements broke down as a result of political unrest. He said Indonesian President Abdurrahman Wahid had mentioned that risk at a recent meeting.

Loss of the revenue would threaten Indonesia's financial sustainability, especially if the cost of rescuing the country's battered banking system mounted, Mr Hatano said.

Indonesian banks have suffered tremendous damage during the past two years of political and economic turmoil. The cost of recapitalising the banks has already reached 5 per cent of national income.

Mr Hatano feared Indonesia's non-performing loans could exceed the published level of 60 per cent of all loans. "We are very much concerned, or afraid, that the Indonesian banking sector is almost, you could say, in a meltdown," Mr Hatano said.

Despite the problems, Mr Hatano reaffirmed Japan's opposition to any cut in Indonesia's official foreign debt, which Jakarta puts at about $72 billion.