Financial markets and analysts have cautiously welcomed Indonesia's announcement of dramatic plans to resolve the country's massive debt problem, despite doubts over prospects for their success.

Markets took heart from the news and the government's call for a "voluntary" debt moratorium on the repayment of tens of billions of dollars in foreign debt crushing non-banking corporates. The composite index of the Jakarta Stock Exchange closed up 0.6 per cent, with early gains trimmed by late profit-taking.

The ailing rupiah rebounded to about 10,500 to the dollar (71p) in late Asian trading, up from a morning low of 14,000, following intervention by the central Bank Indonesia (BI) in a thin market.

The government outlined plans for a "voluntary" moratorium in foreign currency debt service, with separate committees representing senior international bankers from the main creditor countries and Indonesian borrowers negotiating settlements on a company-by-company case.

The government said it will also stand by troubled banks and fully guarantee all deposits and debts, an announcement seen by analysts as an important first step to strengthening the shaky sector.

"This reaffirms the government's commitment to restructuring the banking sector and should be welcomed by the market," Mr Ferry Yosia, a banking analyst at Singapore-based Vickers Ballas securities firm, said.

The move could help return confidence and lure investors back to private banks, he added.

"The country needs to improve the liquidity of private banks which have seen quite a migration of capital lately." Later yesterday US ratings agency Standard and Poor's downgraded its Indonesia currency ratings.

The agency cut its long-term foreign currency rating to B from BB, and its local currency rating to BB- from BBB, it said.