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Rescue finishes up as a farce


Vatchara Charoonsantikul and Thanong Khanthong examine how political interference and vested-interest lobbying have affected the bailout of the Thai financial system.

Political interference and frantic lobbying from the shareholders of the 58 ailing finance companies have almost turned efforts to resolve the banking crisis into a farce.

It began with the resignation last week of Amaret Sila-on, chairman of the Stock Exchange of Thailand, as chairman of the Committee to Supervise the Merger and Acquisition of Financial Institutions.

Amaret and his panel were mandated by Deputy Prime Minister Virabongsa Ramangkura to design guidelines as to how the suspended finance companies might be revitalised. Amaret was apparently fed up with the confusion over who is in charge of tackling the financial system.

He was upset that representatives of the 58 finance companies succeeded, without his knowledge, in seeking a meeting with Prime Minister Chavalit Yongchaiyudh at Government House last weekend. The group of 58 also twice went to see Chatichai Choonhavan, leader of the Chat Pattana Party at Baan Manangkhasila, to ask for help and sympathy.

The group realised that during this time of economic crisis, it is impossible for its finance members to recall loans from their clients or raise capital to the level that makes it possible for them to resume lending. The only way for the group of 58 to survive is to let the Financial Institutions Development Fund, which has injected Bt430 billion to help these troubled finance companies withstand a run on deposits, to convert this gigantic loan into equity.

A series of such incidents have made Amaret and his panel look like yet another lame-duck committee. Originally, the Amaret panel had been assigned to look at criteria for the suspended finance companies on recapitalisation, the submission of repayment schedules to the Financial Institutions Development Fund along with improvement in general management, and the firms' liquidity management, seeing that sufficient funds were reserved for the withdrawal of promissory notes.

Amaret's formal resignation has been withheld, for fears of a confidence backlash, until tomorrow when the Council of Economic Ministers will have a chance to scrutinise his recommendations on how to salvage the 58 finance companies.

The recommendations may be incorporated into the comprehensive package to revitalise the financial system, due to be approved tomorrow by the full Cabinet. The group of 58 also wrote an open letter to Michel Camdessus, the managing director of the International Monetary Fund (IMF), to clarify its position regarding the prospect of its salvage.

The activity of the group of 58, however, has raised a more important issue: how the banking authorities are going to save the remaining 33 finance companies and 15 banks. If these remaining institutions can't survive, neither can Thailand as a whole. Several analysts have indicated that the conditions of the 58 finance companies, including their reputation, are beyond repair, except for a massive recapitalisation from foreign capital or foreign partners.

In a way, the Amaret panel will also become irrelevant in the presence of a so-called Financial Restructure Agency (FRA). This body, which will be unveiled tomorrow, will highlight a comprehensive package to tackle the financial system. Creation of the FRA is crucial to reviving international investors' confidence in Thailand, for it will signal the country's strong resolve to repair the financial system back to its healthy course.

The problem so far has to do with the confusion over who is really in charge over this crucial rescue effort. Politicians may come and go, yet there must be a body unfettered by political volatility that will stay to clean up the mess. Without a healthy financial system, there is no way to turn around the economy.

In talks with the IMF from the outset, the Bank of Thailand aimed high by having a respectable personality such as Anand Panyarachun, a former prime minister, as chairman of the FRA. A strong figurehead in the FRA and a transparent and credible process to clean up the financial system were the first important steps needed to win back confidence from the international community.

There have been talks that the FRA, including Anand's chairmanship, should be formed by a five-person panel, two of whom should come from the financial industry, one from the central bank and the last from the Ministry of Finance. Ekamol Khiriwat, the former reputable secretary-general of the Securities and Exchange Commission and deputy governor of the central bank, has been cited as a credible candidate to take over the FRA's chief executive officer.

However, Anand, who played a high-profile role in the drafting of the new charter, has on several occasions incurred the wrath of old-style politicians. Ekamol is also not a favourite of the Chat Pattana Party.

So the scouting process has come up other reputable names such as Dr Suthee Singhasaneh, a former finance minister; Dr Panas Simasathien, a former permanent secretary for finance; and Chavalit Thanachanan, a former central bank governor.

Yesterday Thanong Bidaya, the finance minister, declined to identify the candidates for the FRA posts, indicating that the recruiting process is under way. He and other coalition partners in the Chavalit administration are banking on the success of the package to be announced tomorrow, instead of Oct 15, right after the Cabinet has vetted it.

Crucial in the package is how the authorities will cope with the remaining 33 finance companies and 15 banks, some of which have faced a ''silent run" on their deposits due to rumours of their unhealthy financial status. Rough estimates have put a need of somewhere between Bt200 billion to Bt400 billion in fresh money to increase the capital base of the remaining 33 finance companies and 15 banks, hard hit by a deterioration of their asset quality.

There have been reports that the capital adequacy ratio requirement of the finance companies and banks will be raised from 8.5 per cent to between nine per cent and 9.5 per cent or, in another version, to 12 per cent. Yet officials said it will be extremely tough if the Thai banks are forced to meet the Bank for International Settlements (BIS) standard of 8.5 per cent as a capital-to-risk-asset ratio. (Financial institutions are required to set aside capital at a certain level as a cushion to their lending risks.)

There are also questions of how the finance companies or banks will approach their income recognition in their books, not to mention the provisions for loan loss before they can settle on the BIS standard.

''They might need to start the BIS ratio from six per cent before rising to seven or eight per cent," one official said.

An eight per cent BIS standard will require the finance and banking system to raise a combined Bt200 billion to Bt400 billion in fresh capital. Such money certainly will be largely foreign capital since the Thai shareholders have all gone broke in the meltdown of the capital market and the crash of the Thai currency.

The banking authorities appears to prefer a one-time recapitalisation to resolve the financial system once and for all, yet the IMF has questioned whether the resources are there to fulfil the recapitalisation objective. The Swedish banking system, which suffered a crisis similar to Thailand's, went through a three-year recapitalisation process.

In Thailand, the recapitalisation time-frame for the finance companies and banks will have to fit with the tenure of the FRA, which will be around until it cleans up the financial system. The FRA will certainly need funding for its bailout, money that will come from the taxpayers.

The Thai government has struck a deal with the IMF to try to achieve a budget surplus of one per cent of the gross domestic product. This surplus, estimated at Bt50 billion, will be used specifically to bail out the financial system. The deterioration of the asset quality of the Thai finance companies and banks will create a situation in which there will not be enough money to give back to the depositors if all the finance companies' and banks' assets are to be liquidated.

In the end, the taxpayers will have to foot the bill, a cost to the nation that the officials have so far been unwilling to clarified. Since taxpayers will be shouldering the burden of bailing out the financial system, they are entitled to a transparent process, one by internationally-accepted standards, to lead the country out of the financial crisis.

The way the politics is going, the Thai public may again be left with just more wishful thinking.



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