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Thailand offers a financial role model


The Thai experience can be used in dealing with foreign creditors, Thanong Khanthong says.


SINCE British Prime Minister Tony Blair called for a radical refurbishing of the International Monetary Fund and the World Bank on Sept 22, significant progress has been made on painting a new look for the world's financial system. Talks about a new global financial architecture will also be one of the highlights at this week's meeting of the Asia-Pacific Economic Cooperation (Apec) in Kuala Lumpur.

In any event, the new architecture of the global financial system will not be a complete recreation but is more likely to be old wine re-fermented. A meeting of the Group of 22 (G-22) countries in Washington DC last month produced a broad outline on what the new global financial architecture should be based in order to cope with any future financial crises.

In summary, the G-22 report suggests that the IMF and the World Bank should encourage the private sector to embrace loss sharing in the event a country faces a financial crisis. Other recommendations include measures to improve transparency, upgrade risk evaluations, strengthen the banking system, and enhance surveillance in macro-economic policies and international financial systems.

Calling on creditors to embrace loss-sharing in an effort to relieve the debt burden of a crisis-hit economy is really a big head-start in improving the health of the global financial system. When Thailand suffered a full-blown financial crisis after floating the baht on July 2, 1997, the prevailing standard comments were that the crisis largely stemmed from the country's insistence on pegging its currency to the rising US dollar for too long and from structural weaknesses in the banking system. Little was said about the role of the foreign creditors, who stuffed Thailand with loans more than it really needed during the bubble era until its debts to GDP exceeded 140 per cent.

Only recently did US Treasury Secretary Robert Rubin come out to say that the crisis in Thailand had less to do with the Thai currency than the fact that the foreign creditors failed to employ adequate risk evaluations in their lendings to Thailand and the other emerging markets. Thailand's private sector debts amounted to almost US$70 billion in 1996, which could only be serviced by net export earnings. Thailand's falling export competitiveness was one of the major factors that scared off foreign creditors, who rushed to the exit at the same time when they learnt that the country might not have enough reserves to service the foreign debts.

The concept of loss-sharing was never in the mind of the IMF when it started to formulate the $17.2-billion rescue programme for Thailand in late July and August 1997. In fact, the IMF's mindset at that time was to represent the interest of the foreign creditors, who did not want to lose their shirts for their mistakes. The IMF's preoccupation was not only to assure that the foreign creditors got back every penny of their loans to Thailand but also to punish Thailand's crony capitalism. There was a complete absence of any measures to help improve the social safety net although a majority of Thais are suffering dearly from the economic and financial crisis.

The International Finance Corporation, the private sector arm of the World Bank, applied tremendous pressure on the Thai government to guarantee the foreign loans because it had huge exposure to the insolvent Finance One Plc and other Thai enterprises. Rerngchai Marakanond, the former Bank of Thailand governor, recalled in his memoir on the baht crisis that the IFC representative gave Thailand a very difficult time during the episode. The IMF followed up by telling the Thai government to guarantee all the foreign loans in order to restore the foreign creditors' confidence.

The fact was that the foreign creditors' confidence could never be won back in a crisis-hit country like Thailand. The IMF would have preferred that the Thai national assembly pass legislation to guarantee all the foreign creditors' loans. While Dr Virabongsa Ramangkura, the deputy prime minister in the Chavalit government, was recovering from an appendix operation, he tried to negotiate with the IMF officials by having the Thai Cabinet adopt a resolution to guarantee the foreign loans instead of passing this matter to Parliament. But the IMF's stand was that Thai governments came and went and that the only way to regain foreigners' confidence was for Parliament to pass the law.

In October, during the Chavalit government's reign, Parliament did pass the law to guarantee the foreign loans, thereby committing Thai tax-payers to shoulder the huge burden of the financial sector. Thailand had no bargaining power or any other choice at that time. Still, that was one of the ugliest episodes in Thailand's parliamentary history.

Ever since Thailand has proved to be an excellent student of the IMF, repaying foreign loans owed by the financial institutions in good faith. For the foreign loans owed by the corporations, the creditors would have to work out the debt rescheduling by themselves. Out of the $17.2-billion rescue fund from the IMF, Thailand has disbursed more than $10 billion to support its balance of payments crisis. In effect, this $10 billion was used to service the debts to the gratified foreign creditors. The tough IMF medicine to contract the economy has also led to a surplus of the current account. In the first seven months of this year some $8 billion flowed out of Thailand, equally matched by the current account surplus of $8 billion. This is one of the main reasons why most of the short-term debts of $40 billion has almost left the country in a hurry to create a liquidity crisis.

In the case of Russia, it decided to default on the foreign loans of more than $10 billion when it faced the rouble crisis in September this year. This scared off the creditors, leading to a world-wide retreat from the emerging markets. Capital is now flowing back to the centre or the industrial world, drying out the liquidity in the periphery or the emerging markets to create a global crisis. If the global financial system is to be fixed, certainly it will have to start somewhere with a more efficient system, including some loss sharing by the creditors.



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