Virabongsa based his view on the deteriorating conditions of the Thai economy despite improvements in key macroeconomic indicators such as low inflation, falling interest rates and a stable currency.

Virabongsa, also expressed similar views over the weekend at The Nation Roundtable discussion between the IMF and a select group of Thai academics. Thai academics said the macroeconomic improvements have given rise to illusions among most Thais that the economy will soon start to recover, leading to a return of foreign capital which will enable banks to recapitalise as well as facilitate the sale of assets by the authorities and businessmen.

''The key point is whether the economy will recover or not. If it does not recover, capital will not return, the NPL problem will deteriorate further and banks won't be able to recapitalise,'' he said. If this turns out to be the case, Virabongsa recommended that Thailand should abandon the market-friendly reform measures as prescribed by the IMF which is asking Thai banks to do the the impossible. He called for the authorities to relax banking standards, either in the area of capital adequacy or provisions for loan-loss as banks won't be able to meet the requirements, adding that the government should help keep the banking system afloat until the economy recovers.

Virabongsa's view, which has been gathering support among Thai academics, was in sharp contrast with the IMF support programme which is aimed at restoring Thailand's free market mechanisms through drastic financial and economic reform.

In short, he thinks that Thailand is not on the right path to recovery given the heavy damage to the real sector caused by the financial and foreign exchange crises.

But he cautioned against nationalising the remaining banks because that would further cripple the banking system, as evidenced by the dilemma of the six nationalised banks which are mere sitting ducks with an NPL averge of 62 per cent in their books.

The latest figures of the Bank of Thailand showed that NPLs in the banking system have climbed, albeit at a slower rate, to Bt2.73 trillion, representing almost 46 per cent of total loans in the banking system.

Fitch IBCA, an international rating agency, projected that the Thai private banking and finance sector require a further injection of Bt600 billion in government money -- on top of the Bt300 billion provided in the Aug 14 Banking Restructuring Programme -- to stay afloat. Standard & Poor's, the US rating agency, also raised the estimated cost to the Thai government in restructuring the Thai banking system to 35 per cent of 1998 gross domestic product from its previous estimate of 30 per cent.

Thailand's reform efforts have also been stalled by delays in the passage of key government-sponsored financial reform bills, particularly the bankruptcy and foreclosure laws. S&P's warned that with NPLs approaching 50 per cent, the government must act promptly to pass needed legislation on bankruptcy and foreclosure, to forestall a collapse of the payment culture, to limit further erosion of recovery values on underlying collaterals, and to enable the financial system to resume normal intermediation.

S&P's puts Thailand's outlook at negative and its long-term sovereign and senior unsecured ratings could lose its investment-grade status if it fails to undertake serious private sector reform, or if alternative non-market proposals -- such as those of Virabongsa's -- gain widespread public support.

Dr Pisit Lee-ahtam, deputy finance minister, admitted yesterday that delay in parliamentary passage of the 11 key economic laws has affected the pace of the economic reform and undermined investors' confidence. ''Instead of seeing our rating moving up by S&P's, our rating is kept at the same level. This is because our efforts to tackle the economy are not making progress as expected,'' he said.

Virabongsa said the economy won't recover soon as it is facing a liquidity trap similar to what Japan is now experiencing. He said lower interest rates won't induce further investment because factories are running at only 50 per cent of capacities. Demand won't pick up because the people, even though they have more money in their hands through the tax breaks, are uncertain about their future and the prospects of unemployment are still a threat. Fiscal expansion also has its limits because it takes time. Bureaucratic red tape need to be overcome before government money really goes into investments to stimulate the economy, he added.