When Financial Gambles Trickle Down to Indonesia's Streets

If you want to know who plunged a country of 200 million people into poverty, ask the Harry brothers. But don't forget to ask Chase Manhattan, Citibank, and American Express too.

The five Harry brothers have been reasonably successful shrimp exporters since 1966 near Surabaya, the second-largest city, after Jakarta, on the island of Java. Their Sekar Group has 10,000 workers, making it the area's second-largest employer. Foreign banks have found Sekar a reliable partner.

But something went horribly wrong in late 1996 and early 1997. Company balance sheets for 1996 show that profit margins were up even though the company's main business was running into difficulty as pollution made shrimp harder to catch.

By then, the real profits were made speculating on the dollar. In what is called a "forward swap," the company bought dollars with rupiah, the Indonesian currency, in exchange for a promise to sell the dollars back in the future. Sekar presumed that the dollar exchange rate against the rupiah would only decline by 2 or 3 percent. That was much cheaper than borrowing domestically. Many Indonesian companies borrowed simply to deposit funds in banks, not to fund operations.

After years of swapping small amounts, Sekar in early 1997 arranged for at least $600 million in swaps with 15 banks and issued a wave of short-term bonds as well. "They went crazy," says one banker who lent to Sekar, interviewed by the Monitor on condition of anonymity. "The upside was 1 or 2 percent. On the downside, there was no bottom."

Until August 1997 that bottom had been a government policy to depreciate the rupiah by no more than 3 percent per year.

But then the rupiah crashed, along with most regional currencies. It is now worth a fifth of what it was worth then. Thus Sekar's debts, now estimated at close to $1 billion, cost five times as much to pay. In 1996, the last year the company reported, profits were only $13 million.

Sekar is only one of the more ambitious risk takers among more than 100 leading Indonesian businesses, from small-fry shrimp farmers to managers of multibillion-dollar conglomerates who made gambles like this.

So did foreign banks. Chase Manhattan, American Express, Citibank, Deutsche Bank, Crdit Lyonnais of France, Rabobank of the Netherlands, Standard Chartered of Britain: They were all in on it. And most lost.

But Indonesia's people lost more, even though they were never in the game. Investors panicked when they realized how deeply exposed Indonesian companies were. Investors sold shares and stopped lending. Indonesian conglomerates that had borrowed on little but their good name rushed to buy dollars to pay their debt, which drove down the rupiah further and increased the value of the debt in rupiah, causing a vicious cycle.

Swept along in this spiral were the Indonesian poor, who lost their jobs and saw prices of imported foods skyrocket. Combined with a bad rice harvest, the economic crisis has brought food shortages to parts of Indonesia and left millions more malnourished because they cannot afford to pay for what is on the store shelves.

THE Harry brothers are not starving. Mercedeses and BMWs still pulled up to their office earlier this month, but guards say the brothers are out of town. Phone calls have not been returned.

The brothers avoid most of their debtors and decline numerous requests for comment. Sekar has paid back only one bank, Rabobank, in January.

Chase Manhattan, American Express, and a handful of European banks have cried foul.

"They want us to go away and forget about them," a European banker says. "But we know they can pay." Several of Sekar's lenders plan to sue it as soon as amendments to the bankruptcy law come into force Aug. 20.

Chase, which would not comment, is said to hold the largest claim on Sekar. But none of the banks' debts are large enough to do more than marginal damage to shareholders at home.

Three of the banks involved conceded, on condition of anonymity, that they were well aware that Sekar was speculating on the dollar.

Many Indonesians, and even some of the bankers themselves, say that international banks should publicly accept their share of the blame for the Indonesian crisis and write off part of the debts owed. Few have done so, putting their hopes on the new bankruptcy courts.

That may mean that thousands of Sekar Group employees, and millions of others across Indonesia, will lose their jobs.