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Thaksin forced to work with financial sector

March 2, 2001


DURING the election campaign, Thai Rak Thai leader Thaksin Shinawatra and his aides fiercely attacked the Chuan government for focusing on tackling the financial sector without paying any due attention to the plight of Thai businesses, the real sector. In other words, the previous government was accused of bailing out the rich at the expense of the poor. Yet a reality check has forced Thaksin to deal with the financial sector as his first policy priority.

About two weeks ago, following the banks' move to cut interest rates, Thaksin immediately complained that he did not want to see the interest rate spread - the difference between loan rates and deposit rates - exceed 3 per cent. Banks are now ripping off their good customers by keeping the nominal spread at 4-5 per cent because they still have a huge proportion of bad assets on their books. A large amount of debtors have also ripped off the banks by defaulting on their loans.

The first group of businessmen Thaksin met as prime minister was made up entirely of bankers - not local entrepreneurs, SME operators or farmers. Predictably, nothing happened because the wide bank spread continued to reflect a deformity in the Thai banking system.

Shortly after forming his Cabinet last week, that reality check kicked in. First on Thaksin's agenda was, you bet, banking problems, for without a stable financial sector, the economic recovery can never be sustained. Populist policies might win votes, but they won't help the economy to recover. So Thaksin moved quickly to organise a seminar in Cha-Am to lay down the framework for the establishment of the national asset management corporation (AMC). The bankers were caught off guard after the AMC was rammed down their throats.

During the three-day parliamentary session to scrutinise the government's policy statement this week, the AMC was subject to intense debate. The Democrats - from Chuan Leekpai to Tarrin Nimmanahaeminda, Ekamol Khiriwat and Abhisit Vejjajiva - lined up to accuse the government of planning to hand out money to the rich through the planned agency and to create a bigger public debt burden further down the road. What a turnabout!

In his handling of the financial sector, Tarrin did not actually hand out money to the rich. There were four market-oriented strategies involved in Tarrin's financial sector reform. First, the government closed down 56 finance companies and liquidated them through the Financial Sector Restructuring Authority (FRA).

Second, Tarrin intervened in the weak finance companies and banks by writing down their capital to one satang per share, before forcing them into mergers. The Financial Institution Development Fund converted its credit extended to these weak financial institutions during the bank run into equity, effectively taking control of more than half of the Thai banking system. The shareholders of the financial institutions lost their shirts overnight.

Third, Tarrin set up the August 14 Banking Restructuring Programme to support the banks' recapitalisation. But the banks are not getting money for free. They have to bear the loss up front by setting provisions for the loan losses before they can apply for official capital support. But to qualify for the capital support, the banks have to raise 50 per cent of the capital they are aiming for, with the other half to be contributed by the Finance Ministry.

Fourth, the banks were encouraged to set up their own private AMCs to tackle bad debts. The government worked out a new legal framework and bankruptcy process to speed up the debt restructuring. The Corporate Debt Restructuring Committee, chaired by the Bank of Thailand governor, also mediated disputes in the large debt restructuring cases between the creditors and the debtors.

Yet more than three years after the financial crisis, bad debts have only been brought down from 60 per cent to around 20 per cent of total loans. The economy still cannot move on with this debt overhang and widespread insolvency among the business and corporate sector.

Tarrin grumbled that he had wiped out the shareholders' equity of the weak banks before injecting government money to protect depositor's savings. Yet he was accused of giving away public money to the rich. He then charged in Parliament that the national AMC, as |currently being designed by the Thaksin government, is a direct attempt |to hand out the taxpayers' money to the rich.

Tarrin's charge is true. For Thaksin's national AMC would buy out the bad debts from the banks at net book value at discount. If the discount is steep, the banks will not be happy. If the discount is not steep, the tax-payers will shoulder a heavier burden. But if the AMC is to be implemented, pricing is not important, otherwise it could never be created.

Thaksin would like to tackle the financial sector problems once and for all. Through the AMC, he aims not only to restore health to the banks so that they can lend money again but also to simultaneously restructure the industries and businesses. But as the World Bank has warned, the national AMC is not a magic solution. Preferably, the government should focus on strengthening the bankruptcy regime to speed up the bankruptcy process.

Moreover, as Tarrin and Bank of Thailand Governor MR Chatu Mongol Sonakul have pointed out, most of the bad debts to be bought out by the national AMC have already been in the court process. As Chatu Mongol said, the national AMC "is like throwing a stone at somebody's head and then picking it up, polishing it and throwing it again at the same person's head".

BY THANONG KHANTHONG

 

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