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Saturday, April 4, 1998 Published at 15:55 GMT 16:55 UK

Indonesia closes seven banks
image: [ A depositor from Bank Surya reads instructions on how to retrieve his savings. ]
A depositor from Bank Surya reads instructions on how to retrieve his savings.

Indonesia has closed seven banks and placed seven others under formal supervision because of their massive liquidity problems.

Among those institutions closed are two controlled by a cousin of President Suharto and one controlled by the brother of his son-in-law, Major General Prabowo.

The government ordered the largest state bank to guarantee the deposits of those closed down.

So far there have been no signs of panic among customers, though queues formed outside banks in Jakarta.

[ image: Finance minister Fuad Bawazier: closures are
Finance minister Fuad Bawazier: closures are "vital part" of reforms
The Indonesian finance minister, Fuad Bawazier, announced the suspensions and supervisions of the now-closed banks on Saturday.

He said the actions represented significant steps in the programme of reforms for the Indonesian banking system agreed with the International Monetary Fund.

"They form a vital part of the government's overall strategy towards economic recovery and a return to much-needed normality for the rupiah exchange rate."

The minister added that the banks had been warned repeatedly, but had failed to take action.

More closures needed

Shares closed down 1.1% after the latest moves, but the Indonesian currency, the rupiah, rose slightly in value, with brokers interpreting the decision as an indication of the government's commitment to reforms.

Analysts warn that further tough decisions will have to be taken quickly to drag the Indonesian economy out of its current difficulties.

Of more than 200 banks in the country, most are believed to be in serious trouble due to bad loans and the collapse of the rupiah.

Foreign banks have stopped offering credit to Indonesian banks, which means even those companies still trading can no longer receive funding to continue day-to-day business.

IMF negotiations continuing

More banks will have to be liquidated before the banking sector is restored to health; until then there can be no economic recovery.

Meanwhile, the Central Bank is continuing to pour millions of dollars into the remaining banks to keep them afloat but it is not clear for how much longer it can afford to do so.

Indonesia is in its third week of negotiations with the IMF in a bid to resume a $40bn rescue programme. The IMF suspended it because it said Jakarta was reluctant to introduce reforms already agreed.

'No favour shown'

A senior fund official, Stanley Fischer, says an agreement on an economic package for Indonesia is likely to be signed in the next week.

He praised the decision to close the banks, calling it, "a major step towards cleaning up the banking system and restoring it to health".

He also noted that several of the banks closed were politically well connected and was pleased that "no favour was shown".

All deposit accounts with the closed banks will be transferred to the state-owned Bank Nasional Indonesia. Trading in shares of institutions placed under supervision will be suspended.

The banks closed are:

  • Bank Kredit Asia
  • Centris International Bank
  • Deka Bank
  • Bank Subentra
  • Bank Pelita
  • Hokinda Bank
  • Bank Surya

    Those placed under supervision are:

  • Bank Dagang Nasional Indonesia
  • Bank Danamon Indonesia
  • Bank Umum Nasional
  • Bank Tiara Asia
  • PDFCI Bank
  • Modern Bank
  • Bank Expor-Impor Indonesia

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