The global market chaos may have revived Thailand's search for scapegoats, but the financial turmoil is getting worse, report Vatchara Charoonsantikul and Thanong Khanthong in the first of a series.

The severe downward pressure on the baht, which dropped like a stone to Bt41.20 on Friday, reflects a deepening of the financial crisis, which is still not on the way to being resolved. At this foreign exchange rate level, the country's economic system could break apart any time.

Some 10 months have passed and been wasted without a credible game plan as to how the asset quality or the non-performing loans of the financial institutions are going to be tackled.

That delay has caused the overblown financial crisis to spill over into the real estate sector of the economy, and, more visibly, to bring about a dramatic overshooting of the baht. Yet most people and some top policy-makers are still confused, believing that economic woes and political instability are the underlying factors behind the bruised baht.

There is no need to re-identify the problem. The mother of the present crises in Thailand has been the financial crisis or, simply put, a belief that the financial institutions are heading toward insolvency.

This is a systemic risk that investors are deeply concerned about, not only in Thailand but also elsewhere in this region. How is it possible that foreign capital, indispensably to keep the capital-deficit Thailand going, will flow back into the country when foreign investors believe that Thai finance companies or banks are going broke? One estimate expects the non-performing loans in the Thai financial system will eventually reach Bt1.3 trillion out of the total loans of Bt6.4 trillion. This amount is equivalent to about 24 per cent of the gross domestic product (GDP). If the finance companies or banks hope to stay solvent, they will need to write down their assets or undergo massive recapitalisation, which might need between Bt300 billion and Bt400 billion.

Without confidence, capital has been flowing out of the country since the beginning of this year to create very tight liquidity, cause deposit runs and send interest rates skywards. The prolonged bout of tight liquidity has led the regulators to close down 58 finance companies. The remaining 33 finance companies and 15 commercial banks stand on shaky ground due to the financial turmoil. They have frozen capital to their customers, good or bad.

When this happens, it means that the second wave of the crisis is now hitting the Thai corporations who will take turns to declare bankruptcy and lay off their workers, triggering widespread social unrest.

Since Thailand is facing a financial problem, it needs a financial manager to resolve it. Amazingly enough, there is not a single financial manager to help untangle the financial crisis. All the top three policy-makers in charge of economic affairs are macroeconomists, who are not keen enough about financial problems in the private sector.

Virabongsa Ramangkura, the deputy prime minister responsible for the International Monetary Fund programme, is a conservative economist in a classical tradition. Finance Minister Kosit Pampiemras is a development economist, with a reputation for rural development. Chaiyawat Wibulswasdi, the Bank of Thailand governor, is a trade economist who prefers to tackle the complicated macroeconomic models rather than dealing with financial institutions.

The ideal candidate to take on Thailand's financial crisis is Tarrin Nimmanahaeminda, a Democrat MP and a former finance minister. Yet he is not likely to get a chance to do the job under the present make-up of coalition politics.

Tarrin has warned about a need to separate the good assets from the bad assets of the financial institutions. Of the 58 suspended finance companies, Bt500 billion to Bt600 billion is believed to remain good and the remaining Bt500 billion to Bt600 billion is bad. Good customers of the suspended finance companies still have ''productive assets" but if their hands are tied behind their backs with the suspended firms their assets will soon turn sour.

Tarrin has called for an effective management scheme to keep the good assets of these companies going by taking them out and placing them in the hands of other healthy financial institutions. Nothing has been done so far on this front and the good customers will certainly be wiped out with the suspended finance companies with which they have built up a business relationship.

The Bank of Thailand, which is responsible for the fate of the remaining 33 finance companies and 15 commercial banks, is slow to set up a definite framework for a sweeping financial reform.

How many of them should be allowed to continue their business? Which banks should be forced to merge with others? Which management should be punished or forced out of their jobs? How will the bad assets be auctioned off as quickly as possible? How can liquidity be extended to the good customers? What is the nature of the alliance between Thai banks and foreign banks? What is the future of the Thai financial landscape?

These are some of the critical problems that the Financial Restructuring Authority should have dealt with. Yet the FRA, after initial over-expectations, has seen its role watered down.

It will be looking after the rehabilitation of the 58 suspended finance companies. Yet any decisions on their fate will be made in consultation with the Bank of Thailand. The recommendations will then go to the Finance Ministry, which then will consult with the BOT again in a possibly endless merry-go-round.

It is this lack of independence of the FRA that led Suthee Singhasaneh, a former finance minister, to decline an offer of the FRA chairmanship.

In the meantime, the bad assets of the 33 finance companies and 15 banks should also be dealt with decisively, similar to the bad assets of the 58 finance companies.

A bankruptcy law must be passed to smooth the foreclosure process. The good assets must be entitled to liquidity, otherwise they will go out of business to create an economic depression similar to the US Depression in 1929.

Without the right signal from the regulators, all the big banks have stopped lending because they need to keep liquidity for their survival. The big banks have a prevailing view that since economic environment is spoiled no good customers survive, so why bother to lend out more money to create more bad debts in their books.