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IMF pressured Chaiyawat to declare swaps


Vatchara Charoonsantikul and Thanong Khanthong take an inside look at Chaiyawat-Fisher negotiations for the IMF rescue package.

After Dr Chaiyawat Wibulswasdi was appointed by then prime minister Chavalit Yongchaiyudh on July 28 1997 to replace Rerngchai Marakanond as governor of the Bank of Thailand, his immediate task was to negotiate a rescue package with the International Monetary Fund.

Chaiyawat was constantly on the phone with Stanley Fischer, the first deputy managing director of the IMF. Both knew each other well. Fisher was Chaiyawat's professor when he was studying for his PhD in economics at the Massachusetts Institute of Technology. The talks laid the groundwork for Thailand's first letter of intent with the IMF.

Fischer gave Chaiyawat a straight talk. As a condition for securing the IMF programme, Thailand needed to disclose its foreign exchange swap obligations, Fischer said. The foreign currency swap contracts had been piled up since late 1996 by the Bank of Thailand to defend the currency peg system. At that point, the Bank of Thailand's foreign exchange reserves were depleted, if the future contracts -- US$20 billion of which were offshore contracts engaged with the hedge funds or foreign speculators -- were taken into account. The future contracts were the Bank of Thailand's top secret, the disclosure of which would be disastrous. That amounted to showing one's trump card in a poker game.

Chaiyawat was alarmed with this demand. Fischer said the condition was raised by US treasury secretary Robert Rubin and his deputy Lawrence Summers. Both were closely following the developments in Thailand. Rubin was indeed the master of the IMF. Disclosing the swap contracts was one of three main conditions imposed by Rubin, aside from transparency and abolition of the two tier currency system. If the conditions were not met, the chance of Thailand securing the IMF package would be missed.

Thailand had no choice but to give in to the tough conditions because it desperately needed the IMF support programme. Capital was not flowing back to refill the Bank of Thailand's foreign exchange reserves for international transactions. Where would the baht -- which was then floated -- have gone if investors realised that the reserves were depleted? No other countries would lend Thailand the credit to back its falling reserves because they too needed to protect their own reserves as financial turmoil was about to rage fiercely across the region.

During the talks, Fischer was particularly tough. Chaiyawat was angered. He did not like Fischer telling him what he could do and what he could not. At one point, Chaiyawat told Fischer to outline 50 key conditions in the support package, so that he could answer in one session, which conditions Thailand could swallow. What Chaiyawat tried to avoid was to have a report to the executive board saying that Thailand turned its back on the programme. That would deal a blow to international confidence.

Fischer tried to show his sympathy. He said he loved Thailand even though the Thai programme would be a strong one involving a one time 3 per cent increase of the value added tax (VAT) to 10 per cent as well as a closing down of 42 insolvent finance companies. The 1997-98 budget would have to be register a surplus of 1 per cent of GDP.

On Aug 14 1997, one day before Thailand entered the IMF programme, Chaiyawat was still busily negotiating with Fischer. Fischer would have liked Thailand to cut sate enterprise spending by another 0.5 per cent of GDP. Moreover, the IMF wanted Chaiyawat to single out the names of the state enterprises earmarked for budget cuts, apart from showing a strong commitment not to bail out companies in the private sector, such as Alphatech. Chaiyawat had to fax to Fischer a 10 page commitment to slash state enterprise spendings, otherwise the IMF would not believe Thailand.

At three in the morning on Wednesday Aug 13 1997, Chaiyawat was still on the phone with Fischer. Fischer told him that he had held three rounds of talks with Rubin and that there had been no definite conclusions. Fischer also talked with Summers for one hour. A day before Thailand could secure the IMF package, Summers was still adamant that he would not support the Thailand programme. Alan Greenspan, the chairman of the US Federal Reserve, also kept a close watch on the Thailand programme. He repeated the US condition that Thailand would not get the international confidence if it did not disclose its foreign exchange swap obligations.

This enraged the Thai banking regulators, that the US was not only helping Thailand, but also blackmailing it into revealing the swap contracts which would only benefit George Soros, the big time hedge fund operators and other US hedge funds. They had no choice.

On August 14 1997 Chaiyawat sent a report about the Bank of Thailand's foreign exchange swap contracts to the IMF executive board, as a condition for accepting the rescue package. He thought that the matter would be kept confidential. When the executive board learnt that the Bank of Thailand had US$23.4 billion in swap contracts due over the next 12 months, it realised at once that Thailand was bankrupt. There would be no confidential treatment. Members of the executive board, who represented their home countries, quickly sent reports back home that Thailand's reserves were depleted and that exposure to Thailand and the region should be terminated.

When Chaiyawat realised that the cat was out of the bag, he decided to reveal the swap contracts in Bangkok on the same day. When the financial markets were informed of the US$23.4 billion swap contracts, they exclaimed in one voice: Thailand was bankrupt. That was the start of the Thai financial crisis, which quickly developed into a regional crisis threatening global meltdown.



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