By Darren Mcdermott and Jathon Sapsford

Indonesia unveiled sweeping reforms of its bloated banking sector, but raised the specter of a debt moratorium as some Indonesian companies will be granted a "pause" in their foreign-debt payments.

The reform package announced Tuesday morning, buoyed Indonesia's fragile currency, which surged dramatically.

The package, shaped in cooperation with the International Monetary Fund and far more comprehensive than many international bankers had expected, aims to shrink the number of banks, guarantee the claims of nervous depositors and creditors on domestic banks, and start cash flowing again through the nation's frozen financial system. Indonesia's Finance Ministry said it will create a bank-restructuring agency that will be funded by issuing government-backed bonds. It will also reform the outdated legal framework for banking operations and cut restrictions on foreign ownership of Indonesian banks.

"The government has decided that from today it will stand behind the commercial banks of the country and guarantee that obligations to depositors and creditors will be met" for at least two years, the Finance Ministry said in a statement. Among the more than 200 Indonesian commercial banks, those that are found lacking "good prospects for restoring themselves" will be placed under the newly created Indonesian Bank Restructuring Agency to be merged, sold off or recapitalized, the ministry said.

"This means that the public can now rest assured their bank deposits are now completely safe and sound," it added, clearly hoping to stem widespread cash hoarding that has threatened to escalate into bank runs.

International Monetary Fund Managing Director Michel Camdessus said he "welcomed" the moves. "It is my conviction that the new measures will be implemented effectively and will contribute to a resolution of Indonesia's present crisis," Mr. Camdessus said in a release.

But there were no reassurances for foreign creditors, as Indonesia's point man for working out its $65 billion in private foreign debt raised the specter of a debt moratorium. "A temporary pause in foreign-currency debt servicing, both of interest and capital, would be needed for ... companies to allow time for new arrangements to be worked out between lenders and borrowers," Radius Prawiro told reporters.

The government has established two committees, one for the nation's foreign debts and one for domestic debts, Mr. Prawiro said. The committee on foreign debt will be headed by Bank of England Executive Director Pen Kent, who said he sees a three-month hiatus in payments likely for some but not all of the 228 companies that fall into the debt-restructuring "framework" he will be constructing. IMF officials, meanwhile, said Indonesia's creditors were forming a steering committee that would establish a liaison with the two Indonesian committees.

It wasn't clear if the payment pause was effective immediately, though Mr. Prawiro said that it would be "most effective" if it were. Most Indonesian companies have ceased making payments in any case.

The reforms are needed to keep transactions flowing across the archipelago, from village markets to foreign-exchange markets. As Indonesian banks have run short on cash and international bankers have cut off lending, even healthy companies have found themselves unable to finance operations like foreign trade that would keep foreign exchange flowing into the country. The central bank, which still has close to $20 billion in foreign-exchange reserves, said it would now stand behind credits issued by local banks, meaning they should again be accepted in international financial markets.

Backing up its words with action, the central bank, Bank Indonesia, jacked up interest rates – pushing the two-week interbank rate to 24% from 18% – and began buying rupiah in the foreign-exchange market.

Even before the announcement, international bankers were questioning whether the measures could fully restore confidence to the nation and global markets. Food prices have been rising in the run up to Indonesia's biggest Muslim holiday of the year, beginning late this week, and fears of social unrest are growing.

Bankers, meanwhile, are just starting to get a feel for the size and complexity of Indonesia's massive foreign debt. In the latest sign of how little is known, Japan's Ministry of Finance has quietly ordered leading Japanese banks to submit a tally of their loans outstanding to Indonesia. Such moves will be necessary before international banks and government can coordinate how to restructure Indonesia's obligations, officials say.

In Tuesday's trading on the Jakarta equities market, the key index rose 0.5%, mainly on the strength of tobacco and banking shares. Traders said trading was generally cautious, as the market digested the news.

But the rupiah rose dramatically on the news. In late Asian trading, the rupiah was at 10,487 to the dollar after ending Monday at around 13,050 to the dollar. Markets in Singapore, where the bulk of rupiah trading takes place, closed early Tuesday and remain shut through the end of the week.

Other Asian currencies rose as well Tuesday. Some traders attributed the gains in regional currencies more to players with long U.S. dollar positions squaring up ahead of the holiday rather than to the effect of the news, pointing out that many details of the measures need to be clarified. Jakarta markets will shut Thursday and Friday.

Some traders were expecting Indonesia's central bank to use the thin market to team up with other Asian financial authorities in a massive effort to boost the rupiah. Singapore and Japan participated in such a move in November, after Indonesia signed its first IMF accord, and a Japanese official said Sunday that Japan would be assisting Indonesian with unspecified measures this week.

Still, after weeks of being distracted by the larger sums involved in South Korea's $153 billion foreign-debt crisis, international bankers and regulators now appear to be turning their attention to Indonesia.

Japan's Finance Ministry told nine top Japanese banks, assembled for a closed-door meeting in Tokyo late last week, to measure their exposure to Indonesia in an effort to "coordinate policies," according to bankers familiar with the gathering. Banks are now preparing to give the ministry those totals, critical data bankers believe will be used to help put together an international rescue package.

Vice Finance Minister for International Affairs Eisuke Sakakibara said Sunday that Tokyo would participate in "some sort of measures" to be announced this week, but didn't elaborate. Japan is Indonesia's biggest single creditor, holding some $23 billion of the nation's private-sector foreign obligations, according to the Bank for International Settlements.

Japan's Indonesian debt tally comes as bankers from Japan, the U.S. and Europe are closing in on a final agreement to restructure South Korea's private-bank borrowing into a series of new government-guaranteed loans from one to three years in maturity. But Japan's bankers say Indonesia's problems are going to be far harder to work out.

South Korean officials have been at a loss to detail their banks' exposure to Indonesia – as have Indonesian officials themselves, who lack an accurate inventory of their foreign debt.

Although bankers talk about working out a way to help Indonesia, in fact they hold few cards in a country where the law prevents them from putting companies that don't meet payments into receivership. "We have no leverage," concedes the regional head of a European bank. "Except that they will cut themselves off from international lending for many years to come."