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.