August 23, 2001
In the final article of a four-part series, Thanong Khanthong explains how Thailand was forced to reveal its future foreign exchange contracts in 1997 at the behest of the United States, and how that disclosure became an issue pivotal in determining whether Thailand received IMF assistance in its darkest hour.
On August 14, 1997, one day before Thailand agreed to formally accept the International Monetary Fund support programme, Bank of Thailand governor Chaiyawat Wibulsawadi was still busy negotiating tough conditions to which Thailand would have to comply with Stanley Fischer, the IMF's first deputy managing director.
Fischer was still laying out new conditions for the rescue package. He wanted Thailand to further bring its financial house in order by cutting state enterprise spending by another 0.50 per cent of gross domestic product. Moreover, he wanted Chaiyawat to specifically identify the names of state enterprises earmarked for spending cuts.
In other words, he and the IMF did not trust the Thai government. Verbal commitments would not be accepted.
Every condition in the rescue package had to be clearly spelled out in writing.
Then Fischer added another condition: that the Thai government had to refrain from its temptation to bail out companies in the private sector, such as Alphatech Co, an electronic parts company which had gone bust.
Chaiyawat bowed to the pressure almost unconditionally. What else could he do? He faxed Fischer a 10-page commitment to slash state enterprise spending. Otherwise, the IMF would have said goodbye.
At 3am on the morning of Wednesday August 13, 1997, a tired Chaiyawat was still working on the phone with Fischer. The IMF man said he had just gone through three rounds of talks with Robert Rubin, the US treasury secretary, who was keeping a close eye on the situation. Rubin would have the final say on the rescue package for Thailand.
Fischer told Chaiyawat there had been no definite conclu-sion on the package for Thai-land as far as Rubin was concerned. Fischer had also spent an hour talking with Lawrence Summers, the number two man at the US Treasury Department.
The situation for Thailand was quite precarious. Even a day before Thailand secured the IMF package, Summers was still adamant that he could not support the Thai programme.
What both Rubin and Summers were demanding from Thailand was that it had to strip bare - by disclosing its foreign exchange swap contracts to the world.
US Federal Reserve Board chairman Alan Greenspan was also following developments in the Thai situation closely. He reiterated the US condition to Chaiyawat: Thailand would not win back international confidence if it did not disclose its foreign exchange obligations.
At that point, Thailand's foreign exchange reserves were almost depleted if the future foreign exchange contracts, with a maturity of one to 12 months (and totalling more than US$20 billion) were taken into account. Capital was also flowing out of the country maddeningly.
"You won't get the confidence from the market if you do not disclose the swap contracts," Greenspan told Chaiyawat by telephone.
This demand enraged Chaiyawat and other Thai officials, who were afraid that disclosing the swap contracts would further wreak havoc on the baht. They were furious about the US demand, believing the US was not only trying to block Thailand from securing the IMF package, but that it was also trying to blackmail Thailand into publicly disclosing its foreign exchange swap contracts.
Thai Treasury Department director Nibhat Bukhanasut, for one, described the US moves bluntly as "blackmail".
For revealing the swaps would only play into the hands of the US hedge funds, which were locked in swap contracts with the Thai central bank. Neither side could afford to blink. Some time in the future the hedge funds and the currency speculators, who had attacked the baht, would be required to hand over the baht to the central bank in return for the dollar with a carrying premium cost. The Thai central bank would be required to do the same in reverse (handing back the dollar for the baht).
The hedge funds would not have baht, because of the imposition of a two-tier currency system that blocked the baht from flowing offshore. And the Thai central bank had sold almost all US currency from its coffers.
Finally Chaiyawat had to cave in. On August 14, 1997, he sent a report on the Bank of Thailand's top-secret foreign exchange reserves, including the outstanding swap contracts, to the IMF's executive board, the supreme body of the IMF. This was the pivotal condition to be ceded to secure the IMF rescue package. Chaiyawat was quite na?ve, believing the matter would be kept confidential within the IMF's executive board. When the IMF's executive board learned that Thailand had $23.4 billion in swap contracts due in the next 12 months, it was shocked.
Thailand was bankrupt.
There would be no confidential treatment for Thailand. Members of the executive board, who represented their home countries, quickly sent reports home that Thailand's reserves were depleted and that their bank exposure to Thailand and the region should be terminated.
When Chaiyawat realised the cat was out of the bag, he decided to tell all. He would disclose the central bank's swap contracts in Bangkok a week later. Hubert Neiss, the director of the IMF's Asia-Pacific department, disclosed Thailand's swap contracts, totalling US$23.4 billion, from Singapore.
He said there might be potential outflow of about half to two-thirds of the Thai central bank's $23.4 billion in outstanding forward foreign exchange obligations in the subsequent 12 months. The figure shocked the financial markets.
Speaking on iTV and Channel 9, Thanong, flanked by Virabongsa Ramangkura, the deputy prime minister, told Suthichai Yoon, the TV host, that only $4.9 billion of the US$23.4 billion in forward contracts was used to defend the baht in mid-May. Another $8.6 billion accounted for onshore swap contracts that Thai companies hedged their foreign exchange risks with at the central bank.
Thanong declined to account for the remaining $9.9 billion in swap contracts. But the financial markets guessed that this amount would have been used by the central bank to rebuild reserves for the dual purpose of offsetting capital outflow and making reserves larger than they should have been. These activities took place when Thailand was facing a balance of payments crisis, it began to experience a deficit of Bt26.6 billion in February, then Bt700 billion in March, Bt15.5 billion in April, Bt112.3 billion in May and Bt24.6 billion in June.
The Bank of Thailand formally said its foreign exchange reserves stood at $37.3 billion in April 1997, $33.3 billion in May 1997, $32.4 billion in June 1997 and $30 billion in July 1997. This fast decline in reserves reflected capital outflow. But the figures did not take into account the off-balance-sheet activity from the foreign exchange swap contracts of $23.4 billion as of August 1997.
On August 20, the IMF's executive board formally gave a blessing to the $17.2 billion rescue package for Thailand. It was a take-it-or-leave-it package that would inflict serious harm to Thailand's recovery for the subsequent two years.