Thanong Khanthong describes an attempt to negotiate a ceasefire with George Soros at the height of the battle over the baht in 1997. Second of a two-part series.

[The first part: Soros' part in the economic crisis]

In late May 1997, Rerngchai Marakanond, then the governor of the Bank of Thailand, and his deputy, Chaiyawat Wibulswasdi, paid a visit to Amnuay Viravan, then finance minister, to brief him on the latest situation concerning financial institutions and foreign-exchange reserves.

Amnuay told them he had met Malaysian Prime Minister Mahathir Mohamad and his finance minister Anwar Ibrahim. The Malaysian leaders told Amnuay about their experience in dealing with financier George Soros, who had attacked the ringgit.

With the strong support of the prime minister, Anwar was able to reach a deal with Soros, who sold dollars back to the Malaysia in return for getting ringgit to settle his positions.

Anwar advised Amnuay that it would be better to seek a private-sector representative to negotiate with Soros and other hedge fund managers, so that there would be no obligations until a final deal was cut.

At the time, the Thai central bank had locked horns with hedge fund managers after the Thai authorities played hardball by closing down the foreign-exchange swap markets.

The move was aimed at preventing hedge fund managers or speculators from having baht to unwind their positions. If the hedge funds had sold the baht short, they would need to borrow the baht to deliver to their counterparts.

Rerngchai went back to consider the ceasefire. He talked it over with Amnuay again and agreed to approach Olarn Chaipravat, then the president of Siam Commercial Bank, to ask him to become the emissary.

The strategy was that Olarn would head the negotiating team, which could offer Soros the baht at Bt27 to the dollar so that the international financier could unwind his position and agree, on gentlemen's terms, not to turn around and attack the baht again. Soros' cost in attacking the baht was slightly higher than Bt26.

Soros was also making contacts for a ceasefire deal through JP Morgan.

He was losing money on his short-term positions, which were not covered, but subsequently would make money on his medium-term positions. In general he was not in big trouble, unlike other speculators who had attacked the baht in the spot market and were trapped in the guillotine of the two-tier currency system. (The two-tier system made it impossible for speculators to attack the baht from offshore.)

Soros' position was largely medium-term, which would be matured in six months. That was the big chunk of the attack. Rerngchai realised that come August, the Bank of Thailand would not have the dollars on hand to deliver to the speculators, as obligated by the currency swaps.

But Soros also realised that the carry-over, or interest, cost of his baht positions would not be worthwhile due to the abnormally high interest rates on the baht.

Rerngchai reached a broad agreement with his aides that the Bank of Thailand would settle only half of its US$14.8 billion in offshore swap positions, which confronted the speculators face to face.

Paiboon Kittisrikangwarn, then the central bank's chief trader, received several phone calls from speculators through local banks asking for a truce. But his reaction was stern. He would not meet the speculators, but he agreed to cut a deal at an exchange rate of Bt23 to the dollar or the forward rate of 9 per cent.

"Take it or leave it," he said.

The speculators wanted Bt26, meaning that the deal would have left them with a loss of Bt3 for every dollar. The speculators were fuming with rage.

It was evident that strong political backup was necessary if this mission was to be successful. When Chavalit Yongchaiyudh, then prime minister, was informed about this plan to talk it out with Soros, Chavalit agreed.

His tone was conciliatory. "It's alright. Let's do it. I am ready to help," he said.

But the political situation at that time was highly precarious. Engaging in this kind of clandestine operation required a stable administration; otherwise, the slightest jab by the opposition could bring down the government. In the meantime, rumours of ceasefire negotiations with Soros quickly became widespread.

Euromoney wrote in its September 1997 issue: "Undeterred by the freeze, those who needed baht offshore to cover short positions became more inventive. One particular exposed speculator - local gossip-mongers reckon it was George Soros - went cap in hand to the central bank to ask for baht and offered to play the bank's game in return by easing off hammering the currency. The Bank of Thailand declined the offer."

In the end, negotiations with Soros would never take place because the finance minister lacked the political back up. Amnuay was about to fall victim to coalition politics, engineered by the Chat Pattana, which wanted to take over economic management from the New Aspiration Party.

In early June Arminio Fraga, a former deputy governor of the central bank of Brazil, who worked for Soros, contacted the Bank of Thailand to cut a deal. Fraga, who would be appointed his country's central bank governor a year later to save the Brazilian real, was then the managing director of Soros Fund Management.

Fraga, who frequently visited Bangkok to investigate the business climate, came over to talk about the possibility of ending the baht war.

But after Amnuay's resignation in late June, he sensed victory. When one of the central bank officials tried to call him to reach a settlement, he said: "I think we can wait a little bit more".

With that sentence ringing in his ear, Rerngchai realised that the Bank of Thailand was about to lose the currency war.