Govt seeks massive bond issue to save banks
THE coalition government of Prime Minister Chuan Leekpai will be seeking a mandate from Parliament to issue bonds worth at least Bt800 billion to bail out the entire banking system as it makes a last-ditch effort to save Thai banks from becoming insolvent and keep the system moving, financial sources said.
The gigantic bond issue will form an integral part of the government's comprehensive bank restructuring package, which will be unveiled on Friday following a special Cabinet meeting.
The size of the tax-payers' money to save the banking system is shocking, for this amount has not included a previous Bt500-billion bill which will have to be set aside from the national budget every year to cover the carrying costs and the losses of the Financial Institution Development Fund in its bail-out of the 56 defunct finance companies and four nationalised banks.
The bonds, which will have a maturity of between 15 to 20 years, will be issued by the Finance Ministry for two purposes, the financial sources said. First, the Finance Ministry will use the proceeds to carve out the non-performing loans (NPLs) in the banking system. Second, the FIDF will share the proceeds to help the troubled banks recapitalise through Tier 2 capital.
In total, the bail-out of the financial system might eventually cost the tax-payer about Bt1 trillion, equal to about 20 per cent of the gross domestic product (GDP). The cost will be borne by the national budget, which will shoulder this heavy burden at least over the next 20 years.
The move to bail out the banking system will be the most challenging political task facing the coalition government, putting Thailand's system to a big test as to whether it will work when it needs to deliver. The whole world is looking at Thailand's banking reform with great interest.
During the presidency of George Bush, the White House pushed for a US$150-billion package to bail out the US savings and loans industry. The package went through a national debate, inside and outside Capitol Hill, through hundreds of emotional hearings and sessions where experts came over to give their testimonies. In the end, Congress voted to pass the legislation, which widened the budget deficit and upset the voters. Although Bush lost the election to Bill Clinton, the banking system was saved and the country was able to move on.
Chuan and his top lieutenant, Finance Minister Tarrin Nimmanahaeminda, could end up with egg on their faces with this unpopular banking reform package for they will commit tax-payers' money to solve the problem that was created by some 20,000 people in the banking and financial sector. Yet it is a do-or-die package, which must get political support otherwise Thailand will have no chance of stopping the downward spiral of the economy.
At this critical juncture, Chuan and Tarrin need all the public support they can get if the country hopes to ever get back on its feet again.
If the NPLs in the banking system reach 35 per cent this year, it will mean the banks will bear Bt1.8 trillion in interest-overdue loans on their books. Already, the credit and billing systems have paralysed the economic system, leading to a culture of defaults. Most of the banks' customers are no longer servicing their debts, holding the banks at their mercy.
If the package is delayed, the NPLs will reach 40 per cent of the total loans, at which point only Bangkok Bank and Thai Farmers Bank will have a positive net worth and the remaining 13 commercial banks will be insolvent. If it is delayed further, there won't be any Thai banks left.
BY VATCHARA CHAROONSANTIKUL AND THANONG KHANTHONG