A meltdown of trust in the finance sector, if mishandled, will lead to further financial turmoil, report Thanong Khanthong and Vatchara Charoonsantikul.

Having secured an International Monetary fund (IMF) badge and a massive US$12 billion to $15 billion in standby credit, the Chavalit government yesterday gambled its political life by unplugging the life support system from another 42 ailing finance companies on top of the 16 that are already bankrupt.

By ordering them to shut down, the Chavalit government has raised the ''death toll" of finance companies to 58, broadening the scope of the damage in the finance sector to more than two-thirds. The total liabilities ­ deposits and other debts ­ of these ailing firms amount to between Bt600 billion and Bt700 billion, significantly larger than what banking authorities earlier wanted the public to believe.

The biggest trouble lies in how the government will stem public panic as people had a sleepless night last night worrying about their savings in other finance companies and banks. There is no more trust left in the Thai financial system.

Most of these 42 finance companies are of medium size and are suffering from a lack of liquidity and the collapse of the credit system. Their assets, however, are not as sour as those of their peers in the group of 16.

Finance Minister Thanong Bidaya reported the names of the 42 ailing finance companies on ''death row" to Cabinet ­ much to the dissatisfaction of some ministerial colleagues who felt belittled because they had not been consulted about the list in advance. Korn Dabbaransi, the industry minister, was so angry that he stomped out of the Cabinet room.

Earlier in the morning some financial executives rushed to lobby Chatichai Choonhavan, leader of Chat Pattana Party, to spare their firms from the list, but to no avail.

The Cabinet was told that so far the Bank of Thailand, acting through the Financial Institutions Development Fund, had spent Bt450 billion propping up the ailing finance companies. However, a Finance Ministry statement said that of this amount, Bt200 billion went to the original 16 ailing firms and another Bt230 billion to the 42 newly-listed firms.

The missing Bt20 billion must have gone to other troubled finance companies not on the hit list.

Deep shock spread like wildfire throughout the financial system yesterday. There was a hectic flight to quality. In an hour, Thai Farmers Bank was reported to have amassed Bt1 billion in fresh deposits, shifted from finance companies and smaller banks. Some promissory note holders of SITCA Finance & Securities Plc, one of the 42, frantically fought to break into the company's offices to redeem their money, but were blocked from entering the premises.

So far, the banking authorities have admitted that the finance sector has been facing a run of between Bt15 billion and Bt20 billion every week. No financial system on earth can withstand that level of massive withdrawals.

In fact, the Thai finance companies have increasingly witnessed a jump in their non-performing loans (NPLs) since the beginning of the year. The NPLs prompted the promissory note holders to redeem their money to the extent that the finance companies would have closed their doors if they were not being propped up by the Financial Institutions Development Fund.

However, on March 3 the Chavalit government shut down 10 finance companies. It immediately tried to assure the public that other finance firms, backed by the Bank of Thailand's coffers, were healthy. But since the government did virtually nothing to shore up confidence and tackle the financial sector crisis with a credible and timely package, the situation grew worse.

On June 27, having just taken on the finance portfolio, Thanong produced another list of 16 ailing finance companies, which included big-time players such as Finance One Plc, CMIC Finance & Securities and General Finance & Securities.

Phatra Thanakit Plc estimated that non-performing loans in the finance sector amount to Bt1 trillion, half of which are bad debts. Overall, the finance sector should report a negative net worth, amounting to bankruptcy in the system.

Fears of the insolvency of Thai finance companies have led to a shift in deposits to larger banks. There has also been a capital flight, which was one of the main reasons that drove the central bank to float the baht on July 2.

Abandoning the fixed exchange regime has ended some of the uncertainty surrounding the baht, yet it has had virtually nothing to do with the financial sector crisis. Rumours maintained all along that there must be several dozen ailing finance companies besides the group of 16. Meanwhile, money continued to be drained out of the finance company system.

Yesterday, Thanong was obliged to confirm that another nightmare exists. He and the banking authorities struck a deal with the IMF that they will try to limit the damage in the financial system by announcing the last list, with 58 companies in total.

There remain 33 finance companies and 15 commercial banks which will be fully guaranteed by the banking authorities. Another empty promise? Thanong and the banking authorities hope that this ''final" list will end all the uncertainty in the finance sector ­ the root of the economic woes.

Backed by ''unlimited" liquidity from the government, these remaining 33 companies and 15 banks will try to act as core groups to take over their ailing peers. Fearing a backfire from the collapse of the finance companies, the government promptly announced it would guarantee all the deposits and creditors ­ local and foreign ­ of the failed 42 firms.

Promissory note (P/Ns) holders of the failed companies can go to the state-controlled Krung Thai Bank to convert their P/Ns. As in the case of the group of 16, it will be six months to five years before they can get their principal back with interest.

The government will soon issue a decree to establish a deposit insurance corporation to protect the public's deposits.

Like the group of 16, the 42 companies will be given 60 days to complete their due diligence and rescue packages. The banking authorities will take 30 days to consider the merger and acquisition proposals.

Apprehensive about retaliation from foreign creditors, the Chavalit government was obliged to announce that it will extend its protection to both local and foreign creditors. They can also convert their P/Ns or other deposits with Krung Thai Bank.

Unclear is where the Financial Institutions Development Fund will get the money to continue to bail out the remaining cash-strapped companies and some weak banks. However, the IMF has promised it will extend $12 billion to $15 billion in standby credit to the Thai government, which can stand to draw this amount to strengthen its foreign exchange reserves and tackle the banks and finance companies.

The IMF will also provide technical assistance to the reform of the banks and finance companies, which will have to operate in a transparent and efficient environment.