Indonesia has cancelled all military ties with neighboring Australia and suspended people smuggling cooperation over allegations that Australian spy agencies tap the phones of the president and his inner circle.
The allegations came from documents leaked by whistleblower Edward Snowden that have been published in the media.
The latest leaked documents shows that Australian spy agencies tapped the phones of President Susilo Bambang Yudhoyono, the first lady and Vice-President Boediono as well as other senior ministers four years ago.
A clearly upset President Yudhoyono likened the spying claims to cold war tactics.
He told a press conference at his presidential palace that things could not continue as usual.
“I have requested that co-ordinated military operations between us be stopped. You know that we face a common problem of people smuggling and I have requested that our joint reaction to this is stopped. Until things become clearer. There is no way that we can continue as usual until we are sure that there is no spying.”
Australia needs Indonesia's co-operation to stop asylum seekers from war-torn countries like Afghanistan from being smuggling to Australia by boat from Indonesia.
The issue is a very sensitive one in Australia and there are already tensions between the two neighbors about who is responsible for stopping the boats.
Earlier this month, Indonesia refused an Australian request to receive a boat of asylum seekers whose vessel, bound for Australia's, had got into trouble after it departed from Indonesia.
Australia and Indonesia have a long and turbulent history in their diplomatic relations, including several recalls of ambassadors.
Indonesian Foreign Minister Marty Natalegaw called the eavesdropping an unfriendly act ... that has a serious impact on bilateral relations.
“We didn’t create this problem. Australia created this problem for itself. We need to maintain our position of authority. We are the victims here of Australia’s behavior and Australia must promptly explain what they did and most importantly that they will not do this again.”
Australian Prime Minister Tony Abbott says he regrets the embarrassment the allegations have caused.
But he stopped short of apologizing for what he called “reasonable intelligence-gathering operations”.
Indonesia’s main business groups say the stand-up could affect hit economic ties.
There was total trade worth more than 1 billion last year between Indonesia and Australia.
Suryo Bambang Sulistio the head of the Indonesian Chamber of Commerce says Indonesia is a major importer of Australian agricultural products.
“Our economic relationship is strong and it’s getting better. For example we are very reliant on Australian meat imports. And we are the largest market for Australian cattle. So they have a significant amount of business to loss.”
And he points out that Australia is Indonesia's 10th biggest export market.
Relations last went into the freezer in 1999 when Australia sent troops into East Timor after Indonesia's military pulled out after embarking on a scorched-earth policy.
During that time Indonesia has also admitted that it tried to tap Australian politicians phones.
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