Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

Creditors are receiving ugly haircuts in Indonesia's debt salon.

Now that the nation's China-fueled commodity boom has gone bust, Indonesia's legal system is busy running a sharp razor across what was once a luxuriant crop of collateral: Standard Chartered's claim on a $1 billion loan to mining tycoon Samin Tan was recently thrown out by a local court on the grounds that a foreign advance against a coal mine -- a national asset -- was illegal.

But as bad as the reflection in the mirror may be, leading to spurious comparisons with the aftermath of the 1997 Asian crisis, the present situation is very different in one key respect: The nation's currency isn't in free fall. That's provided a cushion to share prices and ensured the default risk of Indonesia's publicly traded companies is receding faster than counterparts in several other emerging markets:

Fading Away
The average likelihood of default over the next 12 months has fallen 33% from this year's peak in Indonesia
Source: Bloomberg
Annotations indicate the change in high-yield bonds' default probability from their highest value attained in the year to April 17, 2016.

Indonesia's high-yield bond market tells the story. Of the 75 corporate notes rated sub-investment grade by Standard & Poor's, Moody's and Fitch, 45 are actually relatively safe investments, with a probability of welshing on their agreement to creditors over the next one year of less than 0.52 percent, according to a proprietary Bloomberg metric of default risk. The average one-year default probability of junk-rated companies, including state-controlled gold miner Aneka Tambang, taxi operator Express Transindo and noodle maker Indofood, is 0.87 percent, lower than in China, India and Brazil, the data show.

The risk that these Indonesian firms won't be able to meet their obligations is also down by about a third from the highest point this year. Few other large emerging markets have seen such a steep improvement in credit quality.

On the Up
Returns on dollar-denominated bonds in Indonesia have been rising
Source: JPMorgan

Things could take a turn for the worse if the Federal Reserve presses on with interest-rate increases, putting the rupiah under renewed pressure and making it difficult for Indonesian borrowers to refinance their dollar-denominated debt.

Corporate stress could also intensify if coal prices remain subdued, a nascent recovery in palm-oil prices proves short-lived, or President Joko Widodo's much-vaunted infrastructure push proves a dud. Among large Indonesian debtors, highway operator's Jasa Marga's creditworthiness has worsened this year, Bloomberg data show.

For now, though, the rewards from monetary easing outweigh the risks. Bank Indonesia cut interest rates every month in the first quarter of this year. The central bank will adopt a new policy-rate benchmark in August, effectively pruning borrowing costs by as much as 100 basis points, according to Natixis.

Legal shenanigans around headline defaults by the likes of Borneo Lumbung and Trikomsel may continue to find bankers such as Standard Chartered CEO Bill Winters in the barber's chair. But with overall repayment ability on the mend, lenders will probably obsess less over the severity of the haircut on past loans and allow themselves to be lured once again by Indonesia's attractive yields. Greed, like vanity, will triumph over pain.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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Andy Mukherjee in Singapore at

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