Jakarta – Faced with deadlock in getting embattled Indonesian debtors and banks to agree on debt restructuring, the government Wednesday made a last-ditch attempt to get both sides talking.

But analysts and bankers were skeptical about whether the plan – dubbed the Jakarta Initiative – will work. "The positive thing is that the government is definitely easing the way for constructive conversations to occur," said one foreign banker whose bank has substantial exposure in Indonesia. "But, at the end of the day, the government still isn't putting any money on the table, it's only trying to facilitate the process, but you don't need the government to do that, banks and companies are quite capable of doing that themselves."

Struggling with the apparent failure of the much-touted Frankfurt agreement, signed June 4 between Indonesian debtors and their international lenders, the government – and its international advisers – were under pressure to do something. The Frankfurt agreement – which led to the establishment of the Indonesian Debt Restructuring Agency in August, was supposed to pave the way for restructuring some $80 billion in private sector debt.

Indra offers a voluntary program to debt-laden companies under which their obligations will be extended by eight years and under which they will 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.

The weak level of the rupiah against the US dollar, however, has prompted many to question the merits of entering the agreement at all. No company has joined the agency yet, and some have sought to renegotiate their obligations bilaterally first before tying into Indra.

Many companies are clearly doing nothing, however. "I haven't found one corporate or banker that has given in, they are all having a big standoff," said Agnes Safford, a corporate finance consultant in Jakarta.

The government says this is leading to a liquidity crunch as banks aren't extending new credit until debtors agree to restructure debt, or head to the newly established bankruptcy court. Hence the Jakarta Initiative. "This is Frankfurt Agreement Mark II," said Song Sen Wun, economist at G.K. Goh Securities in Singapore. "It (the original Frankfurt Agreement) hasn't worked before because the government wasn't able to take a role in it. As long as it continues to stay out of the framework, nothing has changed and it won't work again."

The government doesn't agree, arguing that by outlining how to go about restructuring debt – and getting some perks and special breaks in the process – companies will at least come to the negotiating table. "The purpose of the initiative is if companies can be restructured, they can get interim financing to restart operations," said Radius Prawiro, Indonesian head of corporate debt restructuring. "If they resume operations, they start paying tax and more money will go into the government coffers."

Indeed, the Jakarta Initiative offers companies the possibility of revaluing their fixed assets to include items such as land and buildings, as well as removing tax disincentives and time restrictions. It also suggests the companies could secure new credit, urging creditors to extend "critical working capital," to finance company's operations while the debt talks are going on.

But banks say this is simply unrealistic. "I don't know any creditor who's going to subordinate their claims to new finance and certainly not until they have some sort of proof that the owner wants to keep the company and is willing to inject some of his own money," the foreign banker said. "Otherwise that's just ridiculous." Bankers also note that very few Indonesian companies are in any sort of position now to revalue their assets upwards.

What the new initiative may succeed in doing, analysts say, is help convince Indonesian debtors that their businesses are operationally defunct and they can't do business with third parties until they sort out the debt issue. "Why would you buy Indofood if they haven't struck a deal with their bankers?" said Safford, referring to the noodle maker arm of the giant Salim Group which is reportedly on the for sale list. Indofood has some $1.02 billion in foreign debt.

The government is clearly hoping its latest initiative will do just that. Bankers say the plan is hardly targeted at them in particular, noting that banks generally don't need guidelines on how to restructure debt.

The aims of the government are to stimulate the economy and get companies to start implementing drastic restructuring measures to begin to climb out the crisis. To do that banks need to extend credit. As a precursor to that companies need to reach agreement to restructure themselves and their debt.

"After a while when everyone suffers, people begin to look for solutions," said Richard Gitlin of New York-based consultancy Hebb & Gitlin – who is advising the government on the plan. Shoji Nishimoto, director of programs for East Asia at the Asian Development Bank, concurs. "At least it's something if the debtor and creditor sit down and reach agreement on a framework," he told Dow Jones Newswires in an interview. "Then they have common rules of the game."

Crucial to that game however, is banks agreeing to write off some of the loans to their Indonesian debtors, although bankers say this will happen as long as they can recover part of the credit. If the Jakarta Initiative succeeds in hauling companies in to talk, then those writeoffs will appear more quickly, bankers say. "If you can get local companies to understand this, maybe we can start to have real conversations," said the foreign banker. "At the end of the day, that's what it comes down to."