PRIME Minister Chavalit Yongchaiyudh has bowed to tremendous lobbying pressure to guarantee all loans that local and foreign creditors have extended to the 42 failed finance companies ­ a pledge that could eventually cost taxpayers Bt100 billion, informed sources said.

When the Finance Ministry on Aug 5 added 42 finance companies to the original list of 16 being shut down, the Cabinet approved a bail-out package to calm public nerves about the shaky finance sector.

A provision in that package spelled out clearly that the government would not only protect the deposits of the public but would also guarantee the loans of local and foreign creditors.

The protection extended to creditors of the 42 companies was not made available to those who had loaned money to the original 16 companies, which were shut down and ordered to merge with stronger partners in late June.

Sources said Bank of Thailand (BOT) deputy governor Jaroong Nookhwun failed to give a clear explanation as to why the government had discriminated between the two groups when he appeared before the parliamentary committee on economic affairs yesterday.

Sources said Comptroller General's Department head Nibhat Bhukkanasut's initial bail-out package was submitted to the Cabinet without any provisions for the protection of local and foreign creditors' loans.

''The provision to protect the creditors must have been added by the prime minister, who needed to keep a promise ­ he had earlier pledged that there would not be any failed finance companies apart from the group of 16," another source said.

Other sources said Jaroong told the House committee yesterday that the BOT prepared its statement on the 42 firms based on the policy statement made by the prime minister.

Foreign financial institutions have extended outstanding loans of US$5 billion to Thai finance companies. About $2 billion of this went to the group of 16, according to David Procter, country manager of Bank of America.

It is unknown how much of the remaining $3 billion is owed by the group of 42 and how much is owed by the remaining 33 '' healthy" finance firms.

During talks on the bail-out package, International Monetary Fund officials agreed with a plan to protect public deposits at failed finance companies but objected to any extension of protection to creditors.

Sources said the Chavalit government must have been squeezed into a corner by lobbying pressure from foreign creditors and their governments, who could have threatened the administration by deciding not to roll over the short-term debts necessary to cushion Thailand's international reserves.

Meanwhile, former Bank of Thailand governor Rerngchai Marakanonda was challenged by a deputy finance minister yesterday to show evidence that he was pressured by politicians to extend assistance to finance companies in the neighbourhood of Bt450 billion.

Rerngchai, the subject of criticism by the prime minister over his handling of the failed finance companies, was quoted by Matichon as saying that he was pressured by politicians to extend financial assistance to the companies.

Deputy Finance Minister Chaturon Chaisaeng of coalition leaders the New Aspiration Party demanded that Rerngchai clarify his statement, and said he was ''not sure whether he even said that".

Reuter, meanwhile, quoted Finance Minister Thanong Bidaya as saying it would take six to eight months for the 58 suspended finance companies to reform through mergers among themselves or with stronger firms.

Authorities have assured Japanese bankers that Bangkok will guarantee the principal of foreign loans to the newly suspended 42 financial companies, but said that interests on the loans could fall, a Japanese banking source in Tokyo said.

Another Japanese bank official said it would not be surprising if the government asked creditors to reduce interest requirements on their loans to the failed firms.

''It's possible for the country's credit ratings to be downgraded, then borrowing conditions should get worse. It would be no wonder for the Thai government to ask creditors to stop any increase in interest rates, or even reduce [them]," he said.

In the end, the Financial Institutions Development Fund will stand to shoulder all the financial burdens arising from the collapse of the 58 finance companies, with one source estimating the cost at about Bt400 billion. But this amount will be compensated from the government budget, extending over a period of 15 years.

A Royal decree is due to be introduced soon to create a so-called deposit insurance corporation, which will guarantee ­ to a certain extent ­ the public deposits and replace the function of the Financial Institutions Development Fund.

The remaining 33 finance companies and 15 commercial banks will operate under the deposit insurance corporation to prevent further bail-outs like the ones so blatantly mismanaged by the Financial Institutions Development Fund.

BY THANONG KHANTHONG, AMORNLAKANA SRIMUKDA