Behind Bailout, a Very Real Fear of a Run on Indonesia’s Banks, Boediono Reveals

Behind Bailout, a Very Real Fear of a Run on Indonesia’s Banks, Boediono Reveals

By Novianti Setuningsih,Bayu Marhaenjati & Ezra Sihite on 10:10 pm May 09, 2014

Indonesian Vice President Boediono downplayed the extent of Bank Century’s problems to avoid scaring the public. (JG Photo/ Yudhi Sukma Wijaya)

Jakarta. Indonesian Vice President Boediono revealed on Friday that he had deliberately played down the true extent of the rot in Bank Century to prevent a run on banks during the height of the 2008 global financial crisis.

Boediono, testifying at the trial of Budi Mulya, a former Bank Indonesia deputy governor charged with abuse of power for his role in approving the Rp 6.7 trillion bailout, said there was a good reason that a tape recording of a meeting on Nov. 10, 2008, played back by prosecutors at the Jakarta Anti-Corruption Court did not allude to just how bad a state Century was in.

“If I had announced Century’s [true condition] in a meeting that big, it would have been suicidal,” Boediono said. “[News] about a bank experiencing liquidity problems would spread like wildfire and I’m sure that a run on banks would have occurred in just an hour.”

Boediono said he had not fully disclosed the information about Century’s condition in order to prevent the news from leaking to the public and causing widespread anxiety in the country’s banking sector.

However, Boediono said that he did report on Indonesia’s economic condition at the time, which was beginning to feel the effects of the global economic crisis, and cited exchange rate volatility, liquidity problems and huge capital outflows as indicators that allowing Century to fold would cause serious problems to Indonesia’s banking sector and wider economy.

Boediono insisted that Bank Century had to be rescued, saying that Indonesia’s economy was in a risky condition in dealing with the global financial crisis.

“The situation would be critical if one bank collapsed. At that time Century was about to collapse, and it could have created a domino effect on other banks,” he said.

He cited the financial crisis of 1997-98 as an example, where the decision to close banks posed extraordinary risks.

“On November 1, 1998, we closed down 16 small banks, which accounted for just 2 percent of [the country’s total banking] assets. That created a run on banks that lasted until January 1999. In January 1999, a blanket guarantee was issued to restore calm,” Boediono said.

His statement corroborated former finance minister Sri Mulyani Indrawati’s own testimony to the court last Friday, when she defended the decision by the government’s now-defunct Financial System Stability Committee (KSSK), which she chaired, to bail out the lender almost six years ago, saying that it was done to prevent Indonesia’s banking system from collapsing.

“In my capacity as the head of the KSSK, I prevented a crisis. It was proven that Indonesia was not hit by the impact of the global economic crisis as evident in 2009, when Indonesia’s economic growth turned out to be one of the best [in the world],” said Sri Mulyani, now a managing director of the World Bank, based in Washington, D.C.

She added that the bailout decision was aimed at protecting roughly Rp 1,700 trillion worth of assets in Indonesia’s banking sector, and to protect some 65,000 Century customers who held savings of up to Rp 2 billion each and 547 customers with even more than that in their accounts.

However, Jusuf Kalla, the vice president at the time, testified on Thursday said that the threat to Indonesia from the 2008 financial crisis was not as severe as in 1998.

He also said that was shocked when he received a report from Sri Mulyani and Boediono about the initial decision to inject Rp 2.7 trillion into Century on Nov. 25, 2008.

Kalla said there was no legal basis for such a move because extant current government regulations did not govern blanket guarantees or full guarantees.

Kalla added that he specifically brought up that fact several weeks before the bailout was made.

“On November 13, 2008, it was only reported that [Century] had failed to settle transactions. At that time I said that was normal. But then I said the government can’t offer a full guarantee, and therefore a bailout was not allowed,” he told the court.

He said the regulations only allowed full guarantees for customers with savings of up to Rp 2 billion in their accounts, and thus a bailout for Century would violate the government’s policy.

Boediono has been named in Budi’s indictment as having conspired with the defendant and other senior central bank officials to approve the bailout in violation of prevailing Bank Indonesia regulations on the matter.

“The defendant committed corruption along with Boediono, [and deputy governors] Miranda Swaray Goeltom, Siti C. Fadjriah, Budi Rochadi, [Century owner] Robert Tantular and [Century chief executive] Harmanus H. Muslim to grant the short-term loan facility,” the indictment against Budi reads.

Miranda, Siti and Budi all served as Bank Indonesia deputy governors during the bailout. Miranda is currently in jail for an unrelated corruption conviction, while Robert has served his sentence for the banking violations that led to Century needing a bailout.