Yesterday's announcement by the State Administrative Court of Jakarta that the government's takeover of Bank Bali was illegal is a huge blow to Indonesia's recuperation. The court's action questions the legitimacy of the Indonesian Bank Restructuring Agency (IBRA) as well as that of Bank Indonesia - the central bank - which approved IBRA's takeover of Bank Bali. The court's decision was based on perceived errors in the way IBRA assumed control of the bank, not on any doubts as to the fundamental legitimacy of its actions.
The move comes after a similar decision last month in which a Jakarta court refused to declare trading company Comexindo bankrupt despite Comexindo's refusal to pay even 10% of its outstanding debts to IBRA.
The real worry is not that companies are trying to get away with not paying their debts - many companies would try to if there were the chance they could go debt-free with no consequences. Rather, the worry is that endemic corruption and ineptitude run to the core of Indonesia's legal system.
Without a major overhaul of the legal system, there will be no progress in the necessary restructuring of corporate Indonesia. This overhaul will require the wholesale pruning of connected judges, wholesale training of new judges and a total reversal of the present mindset that money and politics, not law, rule the country.
This change of attitude will be the hardest to accomplish, but until it happens, financing for Indonesian companies and businesses will carry a heavy risk premium based on the faults of the legal infrastructure. There will be no buyers of new equity in Indonesian companies, no-one will offer fresh international debt to the country, and very few international companies will dare to make foreign direct capital investments.
The message that the Bank Bali decision sends to international investors is not a pleasant one. The decision means that even the government cannot get a legitimate ruling in its favour. And if the government and powerful agencies such as IBRA cannot seize the assets of recalcitrant debtors, what hope would any foreign banks or bondholders have?