Opinions appear to be divided over whether the Thai government should declare an official debt rescheduling to halt capital outflows. Moody's Investors Service's latest move to downgrade Thailand's long-term foreign currency debts from A3 to Baa1 signals that the door is shutting on the country's prospects of borrowing more money from international financial markets to refinance its external debts.

Thai banks, big or small, have also taken a hit from the Moody's downgrade.

If the balance of payments crisis continues to deteriorate, the question is whether Thailand should play its debt moratorium card. An official debt rescheduling means that Thailand intends to cease debt repayments and negotiate with its foreign creditor banks to extend the loans for a period, certainly under different terms from the original loans.

An investment analyst at a US investment banking house suggests that a debt moratorium may be a good way to halt capital outflows and end all the uncertainties surrounding Thailand's debt repayment status and squabbles with foreign creditor banks. ''The Moody's downgrade is a sign that the country is increasingly not in a position to repay its debts," he says.

The debt moratorium will be negative enough to scare away foreign banks and investors, but the analyst said the foreign banks and investors are quick to forget as in the case of Mexico, which is now back in business with foreign bank loans only a few years after the peso crisis. The Philippines and a number of Latin American countries declared debt reschedulings in the early 1980s, but they are still alive and kicking.

Others say that the debt moratorium will shut down Thailand's opportunity to obtain more foreign credit to refinance old debts. ''We need to borrow money to keep on moving because the size of the external debts is so large. If we declared a moratorium, it would be like setting fire in a building with only one small exit," says a Thai regulatory official.

There is still room for the country to manoeuvre to avoid bankruptcy. Thailand has huge physical assets, which are significantly higher than its foreign liabilities of US$92 billion. ''The problem is that we do not have enough US dollars or hard currencies to cushion our balance of payments. What we have is being depleted, but if we can sell out the state enterprises and bring in some $5 billion, and allow foreigners to acquire finance companies or banks, this may help the country to survive," the regulatory official said.

However, there is a growing risk of systematic defaults in the Thai financial system, beyond any individual borrower's control or strength. The International Monetary Fund has come in with a $17.2 billion bail-out package and a painful economic restructuring programme for Thailand, but the package is no guarantee that the ailing financial system will be restored. The liquidity crisis has worsened the problem and affected the quality of bank loans.

Irene Cheung of Merrill Lynch argues that Thailand has not reached the stage where a debt moratorium is the last option. ''More importantly, debt rescheduling would effectively cut Thailand out of international capital markets for a prolonged period of time," she said. ''A severe capital control similar to this would also likely drive portfolio investors out of the stock market for fear of further capital controls."

Thai finance and banking regulators are having a tough time asking the foreign creditor banks to roll over the short-term debts of $30 billion due this year. The Japanese banks have agreed to roll over 80 per cent, about $25 billion, of their loans to Thailand because they have Thai-Japanese joint venture clients to look after. However, American, European and other Asian banks, which are at loggerheads with the Thai government over their $2 billion exposure to the group of 16 ailing finance companies, are likely to seek immediate repayment of their loans.

Still, Cheung says Thailand's situation is better than the far more serious cases in Latin America in the early 1980s, where foreign debt amounted to $90 billion to $100 billion (as in Brazil and Mexico), backed up by foreign reserves of only a few billion US dollars.

Thailand will have some $40 billion in foreign exchange reserves if the Bank of Thailand's current reserve level of $28.4 billion is added to the IMF package of $17 billion. By netting off the rolling over of bank credit by Japanese banks and the foreign capital that has already left Thailand, Cheung estimates the maximum outflow of capital from Thailand over the next 12 months at around $19 billion.

''Even if the Bank of Thailand closes all the $14.8 billion in outstanding foreign exchange forward contracts in the offshore markets, foreign reserves will be drawn down to $8 billion or $10 billion, a much lower level but not depleted," she adds.