Thanong Khanthong looks at the downfall of Rerngchai Marakanond, the Bank of Thailand governor, who was made a scapegoat for the 1997 baht crisis.

In the waning days of July 1997, political support for Bank of Thailand governor Rerngchai Marakanond deteriorated quickly. The Chavalit government needed a scapegoat for the collapse of the baht.

On July 28, at about 8.30am, a delegation from the International Monetary Fund, led by Hubert Neiss and Carl-John Lindgren, a financial expert, met Thai authorities for the first time since Thailand had signalled its need for IMF support.

The IMF officials met Thanong Bidaya, the finance minister, Rerngchai, Chatu Mongol Sonakul, then permanent secretary for finance, Nibhat Bhukkanasut, director of the Treasury Department, and Chaiyawat Wibulsawadi, the deputy governor of the central bank.

Rerngchai had already submitted a memo to Thanong, outlining a set of policy recommendations and financial and economic conditions which needed to be pursued under the IMF's guidance.

At the Fishing House, a central-bank riverfront office, Thanong, Rerngchai, Chatu Mongkol and other officials debated the IMF programme. Chaiyawat briefly attended the meeting before taking his leave to attend a Cabinet meeting.

Somkid Jatusripitak, Thanong's secretary, took Rerngchai aside and told him he would like to have a private chat with him. Somkid then informed Rerngchai that Thanong would like him to resign because the ruling politicians were planning to remove both the governor and Chatu Mongkol simultaneously.

Rerngchai tried to protest. He said he would like to consult Thanong first before tendering his resignation.

After the meeting, Rerngchai talked things over with Thanong, who said bluntly he could not help the governor, for it was a purely political decision to have him removed.

Snoh Thienthong, the powerful interior minister, wanted Rerngchai to carry the can for the baht mismanagement.

Rerngchai asked that he at least be allowed to stay on a little bit longer because the country was in the midst of important negotiations with the IMF. Moreover, the restructuring of the financial institutions was also under way. After these two missions were completed, he said, he would be willing to step down.

When the Cabinet meeting was over, Thanong went to Government House to meet the prime minister. He informed him of Rerngchai's request to stay on a little longer, but came away with bad news.

"The politicians would not listen," Thanong told Rerngchai.

They gave Rerngchai an ultimatum: he must tender his resignation or he would be summarily dismissed.

Rerngchai immediately went home to his luxury Thonburi condominium. It was a nice apartment, overlooking the Chao Phya River.

He told his wife about his fate. He then had his son write a letter of resignation for him on his typewriter.

On Tuesday July 29, the Cabinet met in Chiang Rai. At a meeting presided over by the prime minister, Cabinet sacked both Rerngchai and Chatu Mongol, who was moved to an inactive post at the Office of the Prime Minister. Chatu Mongkol subsequently resigned from public service.

Chaiyawat was immediately appointed to replace Rerngchai while Supachai Phisitvanich, who was close to Snoh, succeeded Chatu Mongkol as permanent secretary for finance.

Chaiyawat's immediate task was to negotiate the IMF programme with Stanley Fischer, the first deputy managing director of the IMF. Fischer had been his professor at MIT.

The first letter of intent with the IMF was to be drafted by late July.

Fischer set a primary condition that Thailand disclose its foreign-exchange swap contracts, a request made by Alan Greenspan, Robert Rubin and Lawrence Summers, who kept a close watch on Thailand's entry into the IMF programme.

Chaiyawat tried to fine-tune the Thailand programme with the IMF. On August 2, 1997, Hubert Neiss, IMF director for Asia and the Pacific, sent him a note setting out the Fund's preliminary assessment of the Thai economic situation. The draft would form the IMF's policy proposals for discussion with the prime minister that evening. He was scheduled to meet Chaiyawat that afternoon.

The IMF's assessment of Thailand was bleak. Neiss noted that the situation was "precarious". He outlined it as follows: "Foreign-exchange reserves have dropped by US$13 billion this year, to $25 billion on July 25. There are also forward liabilities of the BOT of a similar magnitude. Half of all finance companies are insolvent and are kept operating through massive liquidity extension by the BOT. The latter has already reached Bt400 billion and is coming close to half of annual tax revenues; the outflow continues at Bt15 billion to Bt20 billion a week.

"Commercial banks are undercapitalised and ill prepared for the difficult period ahead when their asset quality will deteriorate further as growth is slowing down and real-estate prices are falling. A few banks could already be insolvent."

Neiss called for the quick announcement of a comprehensive policy package which should be put in place quickly to avoid further deterioration and a full-blown foreign-exchange and banking crisis. This would ensure confidence in the market, he said, and international financial support was forthcoming. His preliminary assessment was that $10 billion to $15 billion in the form of a rescue package would be needed to avoid a serious balance-of-payments crisis, which could push the economy into a deep recession.

The policy package's aim was to reduce the current-account deficit to an amount that could be financed by Thailand. This would bring down the deficit from 8 per cent in 1996 to 5 per cent in 1997 and 3 per cent in 1998. Economic growth would be revised downward to between 2 and 3 per cent.

Inflation, fuelled by the currency depreciation, would be curbed at 8 to 9 per cent.

He also called for restructuring of the financial sector by closing about 50 insolvent finance companies, including the 16 already identified, removed the management and made a credible guarantee on all remaining institutions. Fiscal measures of 3 per cent of GDP would be needed to tackle the cost of financial-sector restructuring, he said, including a VAT increase of 10 per cent. Money would be tight, and the exchange rate would continue to float with limited intervention.