August 20, 2001
Thanong Khanthong recounts the lesser-known second failure of the Chavalit administration in failing to get help from Asian friends so that Thailand would not have to taste the IMF's bitter medicine.
After letting the baht nosedive in July 1997, prime minister Chavalit Yongchaiyudh was reluctant to turn to the International Monetary Fund for financial support, even though the country's foreign-exchange reserves were largely depleted from capital outflows and the baht defence.
Instead, Chavalit ordered senior officials to head for China and Japan to try to secure a rescue package ,because he knew that the United States and the IMF did not hold him in high regard. Thailand by then was suffering from a severe balance of payments crisis.
Nibhat Bhukkanasut, the director of the Finance Ministry's treasury department, and General Mongkol Amphornphisit, the supreme commander, were to go to the People's Republic of China together to try to arrange a loan of US$10 billion (Bt448 billion) to $15 billion to replenish the central bank's foreign-exchange coffers.
Finance minister Thanong Bidaya and Bank of Thailand governor Rerngchai Marakanond were to head further east to Tokyo on a similar mission to save the sagging baht after the float.
Chavalit was close to the leadership in China. The powerful Communist politburo agreed to help Thailand out, but the Bank of China under governor Zhu Rongji, now prime minister, objected.
Lending out its foreign-exchange reserves to Thailand could have created a big problem later on if Thailand were to fail to repay the debt.
It could also have jeopardised Zhu's career. Zhu was smart enough not to risk his political future.
The Chinese leaders ended up telling their Thai guests that they would be willing to participate in lending to help Thailand, but only after Thailand had won IMF support.
The Americans did not like Chavalit, who lacked leadership credibility. Timothy Geithner, the assistant US treasury secretary, believed that Thailand had been facing a crisis of confidence rather than a financial crisis.
"There was a huge amount of capital in the world ready to flow back to Thailand, but this would not happen because the country was facing a lack of political credibility. Without credibility, any bail-out would be just a waste," he was heard saying.
Geithner even urged Thailand to liberalise further its financial industry to attract foreign capital and presumably to facilitate the entry of American financial institutions.
It was Japan that played the most important role in helping Thailand out during this crisis period. The second biggest economy was afraid that its direct investment in Thailand would go down the tube if Thailand were to go bankrupt. The damage would spill over to other Southeast Asian countries, where some of Japan's biggest manufacturing bases outside its borders were located.
Eisuke "Mr Yen" Sakakibara, who was Japan's vice finance minister, was aware that Thailand was in deep trouble, but he did not know exactly how much. The situation remained murky as nobody outside the Bank of Thailand was privy to its net foreign-exchange-reserve position after taking into account its foreign-exchange swap contracts.
Thanong and Rerngchai tried to use their Japanese connections to secure a loan for Thailand, but without knowing the extent of the problem, Sakakibara and other Japanese leaders were cautious about making a full commitment.
Yet it was in Japan's best interest to come to Thailand's rescue. Of Thailand's $90 billion in external debt, $73 billion was in private borrowings, more than half of which was from Japanese banks.
Thanong met Japanese businessmen, members of the powerful Keidanren and officials from the Finance Ministry. After describing the fragility of the Thai economy, Thanong tried to get answers to two questions. First, would Japan stand by Thailand? Second, if not, what should Thailand do next?
In a speech to the Japanese Bankers' Association, Thanong denied news reports from back home that he was heading to Japan to seek $10 billion to $20 billion in bail-out money. At that time the soundness of the Thai financial system was in grave doubt, and the managed float system was surrounded with uncertainty.
"Many scenarios of doom and gloom have been raised even to the point that Thailand is on the verge of collapse and needs to raise funds of $10 billion to $20 billion for purposes unknown," he said. "There is no truth to these rumours. The Thai economy remains fundamentally sound," he asserted.
He tried to explain to his Japanese hosts about the mismatching of funds. Thai corporations had borrowed short-term funds to spend on long-term projects. He asked Japanese bankers to continue to support Thailand by rolling over their loans.
Thanong got positive answers from his Japanese hosts. Japan would stick with its friend through good times and bad. He was nonetheless grilled by officers from Tokyo-Mitsubishi Bank. They were disappointed with the Thai crisis, which was looming larger.
But Thanong understood the Japanese way perfectly. Just be polite to them and they would return his politeness.
The Japanese, who were unsure about Thailand's net foreign-exchange-reserve status, told him that Japan had been in Thailand since the pre-war days and that they had gone through this kind of difficult phase before.
Eventually, the message from the Japanese officials, including the bankers, was clear: Thailand could not rely on Japan alone; it needed the support of the international community.
It was the top officials at the Japanese finance ministry who told Thanong that Thailand should seek support from the IMF. That was the end of it. No further discussions were held.
Thanong talked mostly to Sakakibara. Later on Sakakibara would tell Thanong and Rerngchai that their "country is bankrupt" after he learned that Thailand had lost its reserves.
Nibhat flew to Tokyo to join the Thai delegation. When he heard from Rerngchai about Sakakibara's comment that Thailand was bankrupt, he broke down in tears.
In the meantime, Sakakibara was frustrated by the absence of a global lender of last resort for countries facing a balance-of-payments crisis. Although they had the capacity to be such a lender, the US, the European Union, the IMF, the World Bank and the G-7 countries stood idly by while the Thai crisis spawned a contagion effect. The developed countries believed that the crises in Thailand and Asia were not necessary global phenomena that would impact them.
Rerngchai was still suffering under an illusion. He believed that Thailand could manage to raise money from a mixture of public and private borrowing. He got a signal that Brunei should be ready to hand out $2 billion to Thailand.
JP Morgan, the US bank, was also scrambling to put together a syndicated loan in the massive amount of $10 billion, which would be divided into two tranches of $5 billion each.
If all went well, Thailand would not have to enter the tough IMF reform programme. But in the end it did not work out as planned. All the efforts to raise money for Thailand were stymied.
The answer was always the same: "You'd better enter the IMF programme, and then we will help you." The Thai delegation came home empty-handed.
Thai officials believed that Thailand was a victim of geopolitics. The US, through the IMF, blocked Thailand from getting regional support. Everything had to go through the IMF, where the US had a big say and could closely oversee the programme.
Among Bank of Thailand officials, there had been discussions on whether Thailand should apply to the IMF support programme in order to shore up its reserves. Central-bank deputy governor Chaiyawat Wibulsasdi initially objected. He had worked with the IMF and knew how tough its programme was. It would amount to the surrendering of the country's sovereignty and dignity.
Only after Rerngchai was ousted from office did Chaiyawat begin to see the true picture. Thailand desperately needed money because when the baht was let go in July, the central bank had only $2.8 billion left in net foreign-exchange reserves. Its foreign-exchange swap contracts had reached $23.4 billion. The more than $30 billion in reserves was only a nominal figure that did not take into account the outflow of $23.4 billion over the following 12 months.
Naturally, Chaiyawat did not want to be tied to the IMF programme, because he thought he could do better. In fact, the IMF programme was not much different from what the central bank would be proposing to the Chavalit government anyway. It would compel fiscal and monetary tightening.
Chaiyawat said he could draft an IMF programme in three to four hours off the top of his head.
After returning to Thailand, Thanong told Chavalit that the Japanese creditors said they would stay by Thailand's side only if Thailand joined the IMF. He then called the IMF right away and told them that Thailand needed the standby credit to be put in place within two weeks.
On July 22 the Bank of Thailand agreed officially to apply for the IMF support programme. Rerngchai was busy working on measures to meet the tough IMF conditions. Chaiyawat would be responsible for negotiating with the IMF.
For Chaiyawat, who used to represent Thailand at the IMF as an alternate director, it was a painful personal experience to have to lead the country into the IMF's rescue regime.