ARMINIO Fraga, the Princeton-trained economist who was appointed governor of the central bank of Brazil last week, joined the ranks of Julian Robertson, Bruce Kovner and Lee Cooperman -- the principal hedge-fund operators -- who successfully laid siege against the baht in 1997.

As managing director of Soros Fund Management LLC, Fraga was one of the top lieutenants of George Soros, the big-time international financier. But it was understood that the Quantum Fund, which had a war chest of about US$12 billion, took short baht positions of about $700 million, compared to $3 billion for Robertson's Tiger Fund.

Soros began to hold a bearish view against Thailand from November 1996, claiming that any student of economics could easily see that the baht eventually needed to be devalued. A Bank of Thailand official only confirmed that Soros spent billions of US dollars to attack the baht.

Fraga served for two years as director of the central bank of Brazil's international affairs division before leaving to make big dollars with Wall Street firms. A veteran of Salomon Brothers in New York and in Brazil at Banco de Investimento Garantia SA, the country's major investment bank, he was not a typical technocrat. He used to represent Brazil during debt talks with the International Monetary Fund and the Paris Club group of creditor nations.

Fraga, now 41, was also an adjunct professor of international affairs at Columbia University. He has also taught at the University of Pennsylvania's Wharton School. He has returned to the central bank to save Brazil's real and its economy from complete ruin.

Fraga was reported to be snooping around in Thailand a couple of times between 1996 and 1997 when the baht was wobbling and becoming the most vulnerable emerging-market currency for an assault. He came over to exchange views with the people inside and outside the Bank of Thailand circle. His path would eventually cross with Rerngchai Marakanond, the former Bank of Thailand governor.

In late May 1997, Rerngchai recalled that he and Chaiyawat Wibulswasdi, then the deputy governor, went to brief Dr Amnuay Viravan, the then finance minister, in his office on the fragile state of the financial institutions and the dwindling foreign exchange reserves.

By that time the central bank had almost exhausted its foreign exchange reserves by spending almost $30 billion, largely in the form of foreign exchange swap contracts, to defend the baht and the integrity of the currency peg system. The central bank was literally broke.

Amnuay began to feel the heat. In the middle of that month, the central bank decided to play hard ball by closing down the foreign exchange swap market to create a two-tier currency system. The aim was to cut off the baht supply, hoping to punish the foreign speculators who had attacked the baht and who would need the baht to settle their positions. However, the central bank was also at risk of a default because it was running short of dollars to settle its forward positions.

Amnuay told Rerngchai and Chaiyawat that he had met Dr Mahathir Mohamad, the Malaysian prime minister, and Anwar Ibrahim, the then deputy prime minister and finance minister. The Malaysian leaders told him about their experience in dealing with Soros, who had earlier attacked the ringgit.

In the case of Malaysia, with strong political support of the prime minister, Anwar was able to cut a deal with Soros, who sold the dollars back to the Malaysian monetary authorities in return for getting the ringgit to settle his positions.

Anwar advised Amnuay that it would be wise to seek a private sector representative to negotiate with Soros and other hedge fund managers, so that there would not be any obligations until the deal was cut. By doing so, Thailand and the foreign speculators could put an end to the currency battle.

Later Rerngchai consulted with Amnuay and both agreed that Dr Olarn Chaipravat, the president of the Siam Commercial Bank, should be approached to handle this delicate job. The strategy was that Olarn would head the negotiating team, which could offer Soros the baht supply at Bt27 to the US dollar so that he could unwind his positions and agree on a gentleman's term that he would not return to attack the baht again. Soros' overall cost in attacking the baht was slightly higher than Bt26 to the US dollar.

Soros was also making moves for a ceasefire through his man Fraga and JP Morgan, the US investment banking house. He was losing some money for his short-term positions, which were not covered with enough baht in his portfolios, but would subsequently be making huge profits on his medium-term positions.

In general, Soros was not in the same trouble as other speculators, who attacked the baht in the spot market and got trapped in the guillotine of the two-tier currency system. With the separation of the onshore and offshore foreign exchange markets, they were denied the baht to settle their positions and were forced to borrow at a hefty 1,000 per cent and got burnt in the billions.

Soros' positions were largely medium, which were to mature in three or six months and allow him some time to try to get a hold on the baht.

Then Rerngchai realised that come August 1997, the central bank might 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 short baht positions would not be worthwhile due to the abnormally high interest rates jacked up to defend the Thai currency.

Rerngchai reached a broad agreement with his aides that the central bank would settle only half of its $14.8 billion offshore swap positions. During this time, telephone calls from offshore speculators were flooding the central bank asking for a truce. But the reactions of the Thai dealers were stern.

They were confident that they would win the currency battle because they had the largest baht supply and had also created the two-tier currency system. They eventually offered to cut a deal at an exchange rate of Bt23 to the US dollar or the forward rate of 9 per cent. This meant that for every dollar used to attack the baht, the speculators would lose Bt3-Bt4.

It was evident that strong political back-up was necessary if the Olarn mission were to be accomplished. During this time, Fraga was also phoning Rerngchai asking for a deal.

When Gen Chavalit Yongchaiyudh, the then prime minister, was informed about this secret plan to talk it out with Soros, he agreed. As always, he tried to sound helpful. ''It's alright. Let's do it. I'm ready to help,'' Chavalit said.

But the political situation was highly delicate. Engaging in this kind of clandestine operation needed strong political support, otherwise it could bring down the government. In the meantime, a ceasefire negotiation with Soros was a subject of widespread rumours.

''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,'' wrote Euromoney in its Sept 1997 edition.

On May 28, 1997, Rerngchai submitted a report to Amnuay, expressing his concern that the baht attack could escalate and become a protracted battle because the investors were not confident with the financial and fiscal policies of the government. But Rerngchai still insisted on defending the baht until a definite agreement on altering the fixed exchange regime could be reached with his aides.

Amnuay, who was willing to give the Bank of Thailand the benefit of the doubt, shared the same view. He promised to look into the devaluation options seriously before taking any action. Meanwhile, Rerngchai and his aides could not agree on how to deal with the fixed exchange rate system. But if worst came to worst, they would adopt a floating exchange rate regime.

After Stanley Fischer's departure on May 22 -- Fischer was in Thailand five times during the Chavalit administration, a fact which reflected the seriousness of the looming Thai crisis -- Rerngchai immediately assigned Chaiyawat to study a new foreign exchange regime for the baht.

Unfortunately, Amnuay's status in the Chavalit government was already very shaky. The Chat Pattana Party, the second-largest coalition partner, had been pressing for his resignation, so that its team could take over the entire economic management portfolios. Korn Dabaransi, the then deputy prime minister and industry minister, reversed Amnuay's fiscal tightening proposal to raise excise tax on two-stroke motorcycles, granite and batteries. The snub came as a slap in the face of the finance minister. Amnuay's lack of political leverage also jeopardised his attempt to solve the mess in the financial sector through the Cabinet or the legislative body.

Amnuay also heard about a secret scheme to oust him in a no-confidence debate during which the coalition partners would stab him in the back by abstaining from giving him the voting support.

Amnuay decided to resign on June 19, 1997, sending a sharp reverberation through the financial markets. For Amnuay had been recognised as a staunch defender of the baht. Confidence in the baht evaporated. In less than 10 days, the Bank of Thailand lost more than $4.3 billion alone as a consequence of Amnuay's departure.

''Negotiations with Soros would never take place because the finance minister lacked the political back-up,'' Rerngchai recalled. It was during this time that Fraga called Rerngchai again. He was confident that the central bank was about to give in in its baht defence. ''I think we can wait [on a ceasefire plan] a little bit more,'' Fraga told Rerngchai.

With this sentence, which was still ringing in Rerngchai's ears, the governor realised that the Bank of Thailand was about to lose the currency war.