EU backs IMF warning to Indonesia on rupiah

EU Finance Ministers have given strong backing to a warning to Indonesia that it should not yet try and peg its vulnerable currency, the rupiah, to the dollar. Such a move, ministers believe, would lead at the moment to a violent upward spiral in interest rates and precipitate a further crisis in the economy. Following a lunchtime meeting here with the Finance Ministers, the managing director of the International Monetary Fund (IMF), Mr Michel Camdessus, warned that the proposal by President Suharto was the sort of strong medicine that could "kill" rather than cure the patient. He was backed by the President of the Ecofin Council, the British Chancellor, Mr Gordon Brown, who said Ministers emphatically agreed such a move was "premature". Mr Brown did hint, however, at an EU-World Bank initiative later in the week to tackle the growing food crisis in Indonesia that has led to food riots.

Mr Camdessus also said the IMF was working with countries in the region to see if trade credits can be extended to Indonesia to help with food and medicine. Mr Camdessus confirmed that he has written to Mr Suharto to warn him that unilaterally proceeding with the creation of a "currency board" which would rigidly fix the dollar/rupiah exchange rate would call into question IMF involvement in a $43 billion rescue package for the Indonesian economy. Although he rejected the suggestion that the letter was a "threat", Mr Camdessus said that the creation of a currency board "without agreement with the IMF would be a violation of our arrangement".

"The risk would be such that I had to tell him that it would interrupt funding if he went ahead," Mr Camdessus said. He argued that for such a radical measure to succeed it would require a series of key, but missing, preconditions to be in place: a political will to see through the consequences of spiralling interest rates, strong currency reserves, a banking system capable of withstanding prolonged turmoil and very high rates for some time, as well as a stabilised picture of the debt situation.

Mr Camdessus said that the latest IMF assessment of the effect of the Asian crisis was that it could reduce global growth from an expected 4.25 per cent this year to 3.25 per cent. In Europe, less directly affected, the Commission assessment of a negative impact of 0.2 to 0.5 per cent of GDP was realistic, he said. Mr Brown said that as well as the Indonesian issue ministers had had an important discussion on the reform of the international financial system in the light of the Asian crisis. Their emphasis had been on the need to improve fiscal and monetary transparency and to encourage reform of the banking supervision system.

Such reform would be strengthened, he said, by encouraging "good governance", diplomatic speak for ending corruption and nepotism, and the reform of the international financial institutions. And the latter call, from the IMF's biggest shareholder, was welcomed by Mr Camdessus who said he was gratified by the convergence of views between EU Ministers and the analysis of the IMF itself.