Of the various bitter pills being prescribed by the International Monetary Fund, among the toughest to swallow are the measures to tackle the financial sector crisis.

Details of the IMF package are still being hammered out by the organisation's officials and Thai negotiators, led by Nibhat Bhukkanasut. Meanwhile, the crisis reaches new depths every day, making an easy remedy impossible.

The IMF has made it clear that the government must not draw a single satang from its stand-by credit facility to further bail out the 16 ailing finance companies, or any other troubled finance companies or banks which are not presently on the coma list.

But there are at least 30 cash-strapped finance companies, and some banks, that are slowly falling to their knees.

The IMF's approach is for a reasonable measure of protection for depositors. Official money should not be extended to bail out the shareholders or the creditors. The moral hazard is already present.

The Financial Institutions Development Fund has gone broke handing out more than Bt320 billion to the Bangkok Bank of Commerce, Finance One, CMIC Finance & Securities, General Finance & Securities and the like.

Part of this bail-out was derived from inflationary money drawn directly from the Bank of Thailand's printing presses. This was evidenced by the sharp year-on-year increase in the monetary base of almost 30 per cent in June. The balance of payments crisis also forced the central bank to print money to offset capital outflow.

However, the money must come from somewhere to stop the bleeding in the finance sector. Standard & Poor's, a US credit rating agency, has warned that it has put Thailand's 'A' long-term foreign currency on its credit-watch list, with negative implications. Thailand's credit rating status evolves around the potential scale of problem loans of commercial banks and of finance and securities companies; the intensity of financial stress on the corporate sector, and prospects for an export-led economic recovery; the government's financial sector restructuring package; and the proposed economic stabilisation and reform programme with the IMF.

It is evident from S&P's warning that most of the reform efforts will centre on Thailand's ability to cruise waters troubled by the financial sector crisis. The foreign exchange crisis ­ even after the baht was floated and sunk in value by more than 20 per cent ­ cannot be settled if the financial sector crisis is not resolved decisively.

The baht will certainly plunge to Bt35 or Bt40 a dollar if the government fails in this extraordinarily difficult task.

S&P estimated that between 12 and 15 per cent of the 1997 gross domestic product (GDP), or about Bt600 billion, will be required to tackle the crisis, doubling its earlier estimate of six per cent of GDP.

However, Distinguished Democrat MP Supachai Panitchpakdi believes S&P's figure is too high.

''I think about Bt400 billion should be sufficient to handle the crisis. Of this, Bt300 billion has already been spent. So we need another Bt100 billion," he said.

He sharply criticised the government's failure to adequately spread the bail-out money, so that other smaller finance companies could be kept from going under. Most of the Financial Institutions Development Fund's money was channelled to the big players such as the Bangkok Bank of Commerce, Finance One, CMIC or GF.

Non-performing loans (NLPs) in the finance sector are expected to reach 25 to 30 per cent of the total. This means that the sector will see its net worth wiped out.

''If the NPL in the banking sector climbs higher than 20 per cent, I believe that Thai banks will also go bankrupt," a financial executive said.

Thai finance companies and banks have extended loans equal to about 140 per cent of the GDP, exemplifying the extraordinarily leveraged level of the economy.

Since no more money should be given to the bad finance companies, they will be allowed to go under. But the depositors will be protected by the depository insurance scheme, which will extend compensation over a span of time ­ five years or 10 years depending on the amount of the deposits.

The IMF and Thai authorities will try to strike a deal on how the government should spend the last ­ the absolute last ­ large amount to tackle the financial sector crisis. A recently introduced Royal decree allows the government to dig into its pocket for fresh money to handle the bad debts of the finance companies, which will be expunged from the system through mergers and acquisitions.

There is a proposal to set up an institution specifically to handle the bad debts of finance companies. The good assets of the finance companies will be merged or acquired by stronger firms, leaving the bad assets for the institution to absorb.

A leading economist, Ammar Siamwalla, said the institution may issue government-backed, long-term bonds, with a maturity of 20 to 30 years for the purpose. This would alleviate the problem by broadening the time span. The bonds should total at least Bt100 billion.

Yet the IMF will demand strict fiscal and monetary discipline. Any debt burden created by long-term bonds will have to be deducted from the government budget, which must appropriate the money annually until the bonds mature. But since the government must balance its budget, other painful spending cuts will have to take place to give room for this bail-out bond.

In the end, the public will have to shoulder most the burden created by greedy financiers, who rose and fell with the bubble Thai economy.

However, these measures to deal with the financial sector crisis are not isolated from the entire economic and financial reform package, which must be approved by the IMF. The key to tackling the present crisis is to secure IMF support and international confidence.

The IMF's programme will form a basis upon which foreign creditors will have more confidence in bringing new money into the country to buy out cheap Thai properties or finance companies, thereby alleviating the liquidity crunch and helping restore foreign exchange and interest rate stability.

This market approach to tackling the financial sector crisis is the most appropriate.

''Since most of the problem was incurred by the private sector, we should let the private sector largely sort things out by themselves. If there is confidence, foreign investors will bring new money in to buy out Thai assets," said Surasak Nananukul, an adviser to the prime minister.