Thanong Khanthong investigates George Soros' involvement in the 1997 baht crisis.

In August 1997, a month after the baht collapsed, leading to the Asian crisis, a Thai diplomat attached to the United Nations bumped into George Soros at a party in New York. They talked about the ailing Thai economy - and the sick baht.

Soros told the diplomat that it should have been apparent to any student of the Thai economy for six or seven months that the Thai authorities would inevitably have to devalue the baht.

By pegging the baht to the dollar, Thai authorities encouraged banks and big corporates to borrow US dollars unhedged. The dollar was converted into baht for domestic lending, leading to a credit boom and an economic bubble. With an economic slowdown in Japan and a rising US dollar, trade and capital accounts in Thailand had deteriorated. The baht became unstable, eventually leading to the economic bubble bursting.

Soros admitted to speculating on the baht in forward markets, losing money in the first round but taking profits later. Soros would not reveal the size of his speculation or the profit he made.

But a former Bank of Thailand official overheard talk in the financial markets that the Quantum Fund used some US$700 million (Bt29.7 billion) from its total war chest of $12 billion against the baht. Soros' top aides were Stan Druckenmiller and Rodney Jones.

But the central bank's real enemy No 1 during the attacks was Julian Robertson and his Tiger Fund, which bet $3 billion against the baht.

His colleagues were Bruce Kovner and Lee Cooperman. Other operations and dealers speculating in the market included Goldman Sachs, JP Morgan, Citibank, and BZW. Bandid Nijatha, the then director of the Bank of Thailand's Banking Department, also identified Morgan Stanley as getting involved.

During the conversation with the Thai diplomat, Soros expressed his sympathy for the state of Thailand's economy and the hardship being faced by its people. For this reason, he said he had refrained from making any public statements over his speculation.

"But I would not have been able to speculate [against the baht] if the Thai economy or its financial system were not in such bad shape," he said.

Soros argued that hedge funds did not start the crisis, although they played a role in the turmoil.

"If a trend is unsustainable, it is surely better if it is reversed sooner rather than later," he said in his latest book, Open Society: Reforming Global Capitalism.

"For instance, by selling the Thai baht short in January 1997, the Quantum Fund managed by my investment company sent a market signal that the baht may be overvalued. Had the authorities responded to the depletion of their reserves, the adjustment would have occurred sooner and been less painful. But the authorities allowed their reserves to run down; the break, when it came, was catastrophic."

The Thai authorities fiercely defended the baht for fears that a devaluation would destroy the balance sheets of the country's banks and corporates. Thailand's external debt at that time stood at $100 billion. Every Bt1 devaluation would add Bt100 billion to that debt.

The central bank fought the currency war until they had spent all the country's foreign exchange reserves - more than $30 billion in six months. The battle climaxed in mid-May 1997 when on the 14th speculators alone bet $10 billion against the baht, trying to destroy the currency peg system and devalue it.

The following day Thai authorities played hardball by cutting off the links between offshore and onshore baht markets. Speculators got burnt because they could not get hold onto the baht to ease their positions. Baht interest rates in the offshore market shot up 3,000 per cent in one day.

But Soros' fund would not be affected significantly since it had sold the baht short in the forward market, with a maturity of six months and one year.

Shortly after the creation of a two-tier currency system, Druckenmiller came out to admit that his fund's baht speculation backfired.

"They [central bank officials] kicked our butts and they've taken a lot of profit we might have had," he told the International Herald Tribune then. "They did a masterful job of squeezing us out."

Druckenmiller, who must have profited handsomely from his foray into the Asia turmoil, became one of America's major philanthropists in 1997, donating $36 million to Bowdon College in Maine, his alma mater.

But the name of Soros, who gave Russia $530 million and participated in other philanthropist projects during that time, would not visit Thailand until June 23, 1997. The Nation broke the story about his speculative activities on its front page.

"The Bank of Thailand would like to turn the tables on him - and hurt him with the creation of the two-tier currency system," it reported.

But inside the central bank's headquarters, the officials were very nervous, knowing that they were inching closer to the abyss after they had spent all the foreign exchange reserves defending the baht. But their poker faces held firm.

 A secret attempt to arrange a ceasefire with Soros.