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Lack of data made Thai woes worse


February 25, 1999 -- A look at what went wrong with the IMF in Thailand. Thanong Khanthong   and Vatchara Charoonsantikul report in the first part of a series.


Earlier this year Anoop Singh, the deputy director of the International Monetary Fund's Asia-Pacific Department, said the poor start to solving Thailand's economic problems was compounded by a lack of crucial information and transparency from Thai authorities before the crisis erupted.

''Crucial data on the health of the financial sector and on the forward contracts that were used to defend the [baht] currency, were not made available, preventing a full, timely diagnosis of the gravity of Thailand's situation,'' he said.

In short, had Thailand come clean with information on its ailing financial system and on its obligations over forward contracts -- to the tune of US$30 billion to defend the baht -- it would have suffered significantly less disastrous consequences from a complete loss of investors' and creditors' confidence.

But was it really the case?

Before its approval of the $17.2 billion rescue package for Thailand on Aug 14, 1997, the IMF's Executive Board focused its discussions on whether Thailand should be forced to reveal its forward contracts to global financial markets.

The United States refused to approve the rescue package if Thailand's outstanding forward contracts were not disclosed.

The forward contracts were a sterilising tool used by the Bank of Thailand in late 1996 and well into the first half of 1997 to maintain the integrity of the currency peg system.

When the baht came under attack, the Thai central bank put up a fierce defence by selling dollars from its foreign exchange reserves to the spot market. And since doing so led to an extremely tight liquidity because the baht was sucked out of the system due to the central bank's dollar sell-off, the central bank sterilised its intervention by doing a buy/sell swop (buying the dollar to push the baht back into the system with a promise to return the dollar back to the contractual parties at a certain time in the future). The technique was essentially equivalent to selling forward foreign exchange.

As it turned out, most of the contractual parties of the central bank were hedge funds, which snapped up the forward contracts so that they could build up their baht supply for delivery when the settlements were due. They were hoping to crush the currency peg and force a devaluation so that they could profit by getting the cheaper baht to settle their positions.

In mid-May 1997, at the height of the currency battle, the central bank played hardball by cutting off the foreign exchange market to create a two-tier currency system.

The hedge funds or foreign currency speculators were barred from borrowing baht from Thai banks. The measure hit hedge funds below their belts.

When settlements were due for the three-month forward contracts by August, the hedge funds and foreign treasurers might default on their contracts. The Thai central bank also risked defaulting on its contracts because it had almost run out of dollars in its reserves.

In this eyeball-to-eyeball situation, the central bank found its position weaker vis-a-vis the hedge funds when the country needed the IMF programme for emergency liquidity.

The IMF was not a sympathetic creditor. Robert Rubin, the US Treasury Secretary, would not give the go-ahead to the IMF to support Thailand if it did not disclose its forward contracts.

Thai banking officials were worried that if their forward positions were disclosed, it would have led to a loss of confidence. They were flabbergasted that the hedge funds, which had launched a guerilla war against Thailand, were not subject to the same demand of transparency.

Some were disgruntled that Thailand was being blackmailed by the US government, which was worried about the plight of the hedge funds.

Most of the hedge funds' investors and managers were Americans. The hedge funds were losing money badly and several of them were sweating, including US investment banks whose licences could be revoked if they defaulted. They thought they had nailed the Thai central bank in May when they bet more than $20 billion against the baht. It was a winner-take-all game.

On Aug 20, 1997, Gregory Taylor, the Australian representative on the IMF's Executive Board, came to Thailand's defence.

In his statement to the board, he said: ''I do not dispute the general case for transparency in policy-making or the need to have safeguards against central banks building up, over time, unsustainable foreign exchange liabilities.

The practical issue here, however, is that Thailand has to traverse an extremely delicate transition from the current unsustainable position to a more secure one. During this transition, it is vital that market confidence be maintained.

''The general opinion in the Asian regions is that Thailand's net reserves are about half the published gross reserves, and publishing the figures contained in the IMF paper may well trigger a reassessment by the market, based on a misunderstanding of the gross forward commitment figures. The market will be tempted to net off all the forward commitments directly against Thailand's gross reserve position.

''The thinking underlying such arithmetic is that the swops are a short-term obligation and will be run off. But the reality is that a large part of these swops will be rolled over. Commercial banks need baht if they are to unwind these swops, which gives the Thai central bank leverage to encourage them to roll the swops. In short, those swops should not be seen as simple offsets to the central bank's gross foreign exchange position.''

On Aug 12, Thailand revealed to the IMF's Executive Board its forward obligations of $23.4 billion due over the next 12 months of which $14.8 billion accounted for offshore forwards. The news was immediately leaked that Thailand had used up its reserves and was bankrupt.

For fear of creating inequality in information, the Thai central bank moved quickly to disclose the swop contracts at home. When the hedge funds were able to read the Thai trump card, they knew they were in the money.

Next: IMF provided the wrong prescription



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