VICE-PRESIDENT Boediono on Friday defended the decision to bail out troubled Bank Century at the height of the 2008 financial crisis, saying it was an emergency situation.
Dr Boediono, who was governor of Bank Indonesia at the time, took the stand as a witness in the Jakarta Corruption Court during the ongoing trial of then-BI deputy governor Budi Mulya over the bailout.
"It was an emergency situation. The options were to let Bank Century stop operations the following day and see bank runs, or we allow for the required documents (for disbursement) to be completed later," he said, explaining why procedures were skipped before monies were paid out to the failed bank.
Detailed assessments on the bank's financial strength were not carried out, but liquidity problems had started to engulf the bank at the time the bailout decision was made.
The 6.7 trillion rupiah (S$724 million) Bank Century bailout has been opposed by scores of MPs who alleged that vested interests were served when public funds were made available to the bank.
The ongoing trial also raises concerns that Indonesia's decision to initiate criminal proceedings against those involved in a policy decision, could discourage senior economic officials from taking tough actions in future crises.
Dr Boediono's appearance in court came a day after then-vice-president and then-acting president Jusuf Kalla took the stand. Mr Kalla had claimed he was not well-informed about the problems facing the bank and was notified of the decision four days after the then Finance Minister Sri Mulyani Indrawati and Dr Boediono decided on the injection.
Amid tight security at the court, Dr Boediono's questioning stretched from 8am to almost 8pm, as he patiently explained the pressing conditions that made him decide to approve the bailout in a bid to avoid a repeat of the 1997/98 Asian Financial Crisis and said the main consideration was to prevent confidence in the banking sector from deteriorating amid a fragile situation.
Pressed by prosecutor Pulung Rindandoro that the government had not announced the country was facing a financial crisis, Dr Boediono replied: "I am not a legal expert. I am an economist."
"If what happened then was not a crisis, then I did not know what it was. In 1998, it was no longer a crisis, but chaos," he added.
He explained how in Nov 1997, when the government closed small banks without a blanket guarantee, people started asking which bank would be next.
"People pulled their money and placed them at state banks, at foreign banks and even moved their funds overseas. Severe bank runs took place as confidence in banks plunged," he said, adding that the runs stopped when a blanket guarantee on deposits was issued in Jan 1998. "The 2008 situation was similar," he added.
"Liquidity in domestic banks plunged. People moved their money overseas. The inter-bank money market didn't work properly as banks didn't trust each other. If a bank had extra funds, it didn't want to place them at another bank. This does not happen in normal times."
He also explained that the fragile financial situation then was discussed at length with the vice-president and ministers, and Indonesia saw an average of US$3 billion of capital flight in October and November 2008.
"In an emergency situation -- market psychology wise -- any failing bank would trigger a bank run," he said. "The contagion would travel from bank to bank, from the financial sector to industries, which evenually would hurt jobs."
Dr Boediono acknowledged that the quality of banking supervision, including over Century, could have been better - and the team in charge at BI was reshuffled after the bailout - but said: "We had to make a decision, and the decision that we made was the best in the situation then."
In his closing remarks after spending a whole day at the court, with breaks, Mr Boediono referred to the concern that hard decisions made by civil servants during a crisis might one day land them in court.
“I hope senior state officials will not hesitate making decisions in a difficult time, although there is a risk of being questioned later, as long as it is in the interest of the nation."