Monday, November 10, 2008

On the 2 billion blanket guarantee

Initially I was skeptical with the government's increasing its blanket guarantee from Rp 100 million to just Rp 2 billion (instead of full guarantee). The reason is, the neighboring countries like Malaysia and Singapore do not impose a cap on their guarantee. So it is very likely that big businesses from Indonesia will fly their capital to Malaysia and Singapore. It is true that the government will not be able to bail out all banks once they go bankrupt (which means the government will have to return all money to each deposits). So a cap is justified. But then, it seems increasingly unlikely that people would rush banks at the same time. Similarly, I don't think banks will go bankrupt at the same time. So, even if the government removes the cap and hence provides 100% guarantee, they will not be drained out instantly.

But I'm changing my mind.

Reading the interviews of Kadin chief, MS Hidayat by The Jakarta Post today (10/11/2008) made me very uncomfortable. The business chamber is urging the government to give full guarantee, among other requests. And it sounds like a threat: that they will move their money away from the country if the government doesn't grant their wishes. Now, come to think of it, it has been awhile that Malaysian and Singapore announced their full guarantee while Indonesia keeps its Rp 2 billion cap. Yes, there maybe some capital flight already. But if Kadin's threat is all credible, they -- the businesses or depositors with money more than Rp 2 billion in banks, have surely all gone. Why haven't they?

The tone given in the interview is very familiar. This is what I'm afraid about the current financial fiasco: the rise of protectionism. Remember, Pak Hidayat is not just talking about blanket guarantee. The interview reveals all the usual suspects: import restriction, etc. And with threats. It is one thing to quietly respond to incentives. Threatening is quite another thing, especially when it is not credible.

I think the government should not listen to those threats. If big money is to fly away, so be it.

Addendum: The Jakarta Post's editorial today (11/11/2008) comes with the same tone, albeit more politely: "If, with all these safeguards [vigorous enforcement of good governance practices for banks, etc], the big depositors, estimated to be about 60,000, still intend to withdraw and invest their money overseas with much smaller returns -- only because of the absence of a blanket deposit scheme -- let them go".

Addendum 2: In the same issue of The Jakarta Post (11/11/2--8), Hartadi Sarwono, Bank Indonesia's deputy governor says that the full guarantee is not a bad idea. He says "A full guarantee does not mean that the guarantee will be executed..." Yes we know that, as I said above. But it strikes me that this statement comes from a ... top BI official! I wish they didn't give too many statements, especially if they are the ones who are supposed to be quiet.

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