Shortly after floating the baht on July 2, 1997, Gen Chavalit Yongchaiyudh, the prime minister, was pondering how to seek a financial rescue package to help Thailand avoid further catastrophe. He did not want to submit Thailand to the tough programme of the International Monetary Fund. Since he had good ties with the military leadership of China, he thought that China would be a good friend of Thailand during this hard time. Japan, which had huge investment in Thailand, would also be another good friend. Japan could not afford to let Thailand go under because its investment would also go down the drain too.

Chavalit

Chavalit immediately ordered the top Thai officials to go China and Japan to secure a rescue package. By that time Thailand had already lost all of its foreign exchange reserves from the fierce baht defence since the beginning of the year. The tough IMF programme must be avoided at all cost.

Nibhat Bhukkanasut, the director of the Finance Ministry's Treasury Department, and General Mongkol Amphornphisit, the supreme commander, would be going to the Republic of China to secure a loan of US$10-US$15 billion to rebuild the central bank’s reserves. Siri Garncharoendee, the assistant governor of the Bank of Thailand, also joined this team.

Thanong Bidaya, the finance minister, and Rerngchai Marakanond, the Bank of Thailand governor, would be heading to Tokyo for a similar mission.

Chavalit hoped that the Chinese leadership would come to his rescue. When worst came to worst, he might get support from Japan. The Chinese say "no" On July 13, 1997, the Mongkol team made its way to China as a top secret mission to borrow US$20 billion. The team boarded a military aircraft at the Royal Air Force airport, right behind Don Muang Airport. Nibhat recalled that he jumped into the military aircraft at the Royal Thai Air Force base without having any time to pack. He only got the assignment from Thanong on that very day. Other mission members included Dr Surasak Nananukul, the adviser to Chavalit, Phaisarn Phudmongkhol, the lawyer and a close aide to Chavalit, Siri of the central bank and other working officials.

Panthep Phuapongphand, the author of “The 2540 Confidential Report: The Truth That Has Been Concealed for a Long Time”, accused Siri as a traitor during the ill-fated trip to China. Panthep is a former aide to Chavalit.

Panthep asserted that the mission had failed to accomplish its task because “one of the members of the mission” took the time out to talk to the senior Chinese central bank official in such a way that suggested that Thailand did not need to borrow $20 billion. The following day, when the mission was about to head home, the Chinese central bank told Mongkhol that they were ready to help out Thailand with $1 billion – not $20 billion.

Mongkhol was shocked upon learning about the news, but the mission could not do anything because by that time it was about to leave the country.

Panthep’s book says that upon learning why China would only lend Thailand $1 billion, Mongkhol said: “The one who destroys the country like this should have been executed by a firing squad if it were in the old days”.

Those were dark hours in Thailand’s history, as the country was teetering on the verge of collapse from the financial crisis. Eleven days earlier, the Bank of Thailand decided to float the baht after having depleted its foreign- exchange reserves in a currency war against the hedge funds and the speculators. Although the Bank of Thailand reported foreign-exchange reserves of about $32 billion as of June 30, 1997, in reality it had sold some $30 billion of this amount into the forward market to prop up the baht.

The Bank of Thailand had never reported its “net position” of the foreign-exchange reserves, which were held as a top national secret. It was afraid that if investors or borrowers knew about the actual position of Thailand’s reserves, they would lose all confidence in the baht and the fixed exchange-rate regime.

Chavalit had already written a letter, dated June 26, 1997 to General Liu Huaxing and Jiang Zemin, the leaders of China, asking for China to display its political support to Thailand and for the Chinese central bank to lend US dollars to the Bank of Thailand. He did not specify the amount. But judging by the tone of his letter, the Chinese could understand that the amount must be huge and the situation in Thailand was very precarious.

The Mongkhol mission also carried with it another letter of Chavalit, dated July 12. Phaisarn, who was a legal aide to Chavalit, kept the sealed letter to himself. He was instructed to open the letter only when the mission got to Beijing.

The second letter, again addressed to Liu and Jiang, carried a rather optimistic message from Chavalit, who had been informed by the Chinese politburo that China would be ready to help Thailand with the money needed.

The powerful Chinese politburo agreed to help Thailand out. But the Republic Bank of China raised its objection, believing that Chavalit no longer had the political credibility to run the country.

At that time Zhou Longji, who would later on rise to become prime minister, was the Chinese central bank govenor. Lending out the foreign exchange reserves could spark a controversy later on if Thailand could not repay the loans. It could also jeopardise his status. Zhou was smart enough not to risk his political future.

The Chinese ended up tell their Thai guests that they would be willing to participate in a lending to help Thailand after Thailand had entered into the support programme of the IMF.

Siri

Siri gave a different account. The Mongkol mission failed to achieve its objective because China had never intended to lend $20 billion to Thailand anyway. According to Siri’s side of the story, the Chinese military and politburo might express support for Chavalit as an old friend, yet when the matter was passed on to the central bank, the request was declared dead on arrival. China would not risk that huge amount of money on Thailand.

A Chinese deputy central bank governor – not the governor – greeted the Thai mission. “The Chinese did not intend to lend us the money anyway.

From the position [of the deputy governor], we could infer that because they sent the official who did not have the authority to make the decision,” Siri said.

Indeed, there an some ugly scene during the negotiation for the $20- billion loan from the Chinese central bank officials, who were eager to know about Thailand’s net foreign-exchange reserves. As a lender, it had the right to know.

Siri would not divulge this crucial information, which he considered a matter of life and death for Thailand. Nibhat urged him to tell the Chinese frankly. But Siri’s hesitation caused the embarrassment. Nibhat was so angry with Siri that he used very harsh words with him.

That was the way it was for Thailand’s secret mission, which went home empty-handed. The mission to Tokyo, led by Thanong, would not do any much better.

Bitter sake in Tokyo

Japan instead played the most important role in helping out Thailand. It knew that Thailand was in trouble, but it did not know how bad the situation really was. Most data coming from Thailand remained murky. Japan would not dare to make the full commitment until it was certain what was actually going on in Thailand.

Before going to Japan, Thanong was thinking to himself. How would he handle this difficult task? As he had spent several years in Japan as a student, he understood the Japanese mentality. He would only have one question in his mind -- the huge foreign debt burden of Thailand. At that time, due to poor data collection, nobody knew that Thailand's foreign debts stood actually at US$120 billion, while it had virtually no reserves at all!

Thanong

Thanong had to tackle the debt burden first and it was clear that Japan should be the first country he should talk to since it was the largest creditor. Of Thailand’s US$90 billion in foreign debts, according to data available to Thanong at that time, about US$73 billion accounted for private borrowings.

More than half of which was from Japan. Thanong and Rerngchai would try to make use of their connections. Both were educated in Japan. Thanong studied in Japan from the age of 17 to 22. Rerngchai was also a scholarship student studying in Japan. Their mission was to try to persuade the Japanese creditors to remain committed to Thailand.

Thanong called on the Japanese bankers, businessmen, the Kaideren and also paid a courtesy call to the finance minister. After explaining to the Japanese hosts about the situation of the Thai economy, Thanong would be trying to get answers for his two questions: Would Japan stand on Thailand’s side? If not, what should Thailand do?

In his speech to the Japanese Bankers’ Association, Thanong denied news reports back home that he was heading to Japan to seek some US$10- US$20 billion in bail-out money. At that time the soundness of the Thai financial sector and the uncertainty surrounding the managed float system were in grave doubts.

“Many scenarios of doom and gloom have been raised even to the point that Thailand is on the verge of collapse needing to raise funds of US$10- US$20 billion US dollar for purposes unknown,” he said, “There are no truth to these rumours. The Thai economy remains fundamentally sound.” Thanong was trying to play a poker game.

However, he tried to explain to his Japanese hosts about the mismatching of the funds, with Thai corporates borrowing short-term funds to lend to long-term projects. He asked Japanese bankers to continue to support Thailand.

 “The pressure of globalisation and changing landscape of international environment, requires greater flexibilty in monetary management of the currency. The onset of financial liberalisation and impact of the BIBF development in Thailand was a grave lesson for exchange management. The pressure brought to bear by speculative short-term financial inflows looking for high gains based on arbitrage put tremendous and unwarranted pressure on the value of the baht. The basket formula clearly became an impediment, and indeed allowed speculators to manipulate and depress the value of the baht in the near term, without regards to true fundamental considerations,” Thanong told the gathering of nervous Japanese bankers and top businessmen.

He saw the managed float system as an effective means to cope with speculative inflows of short-term capital. “Our decision to adopt a managed float regime was not a response of weakness, but one of strength and determination; for it will enable greater flexibility in macro- and micro-economic policy adjustments consistent with our key policy objectives, which is the maintenance of sound monetary and fiscal integrity and the attainment of sustainable long- term growth, without undue foreign exchange fluctuations created by short-term capital inflows,” he said.

Thanong got the positive answers. For a moment, he looked like a desperate secondhand car dealer. Japan would be sticking its friendship with Thailand, in good or in bad time. He was nonetheless grilled by officials from Tokyo-Mitsubishi Bank, who were disappointed with the crisis looming. But Thanong understood the Japanese style perfectly. Just be polite to them and they would return their politeness.

They told him that Japan had been in Thailand since the pre-war days and that they had gone through this kind of difficulties before. However, the message from the Japanese, including the bankers, was clear: Thailand could not rely on Japan alone; it needed the support of the international community.

It was the Japanese finance minister, who told Thanong that Thailand should seek support from the IMF too. No no discussion was further made.

Thanong would spend most of his time talking with Eisuke Sakakibara, nicknamed Mr Yen for his influentail comments which could move the currency market. It was Sakakibara, vice minister of the Ministry of Finance, who told Thanong and Rerngchai that “your country is bankrupt” after he learned about its huge currency swap obligations.

From China, Nibhat flew to Tokyo to join the Thai delegation. When Rerngchai told him about Sakakibara’s comment that Thailand was bankrupt, he broke down to tears. Rerngchai did not quite understand the implications of central bank's currency swap obligations.

Sakakibara was also frustrated with an absence of a global lender of last resort in time of a financial crisis of this scale. Although they had the capacities to do so, the US, the European Union, the IMF, the World Bank or the G-7 countries had stood idly at the sidelines while the Thai crisis was about to fuel its contagion effect. They believed that the crisis in Thailand or in Asia was not necessary a global crisis that would affect them.

If Japan did nothing, its huge investment in Asia would melt down. The crisis would also quickly engulf Japan later on. For this reason, Sakakibara had become very outspoken in Japan’s efforts to create an Asian Monetary Fund as a regional lender of last resort.

In the mean time, Rerngchai believed that Thailand could easily borrow US$2 billion from Brunei. JP Morgan also scrambled to put together a deal for Thailand. The loan syndication would have a massive size of US$10 billion, which could be divided into two tranches or US$5 billion each. If all went well, Thailand did not have to enter the tough IMF programme.

But finally it did not work out as planned. All came home empty- handed. The answer was the same: "You'd better enter the IMF programme, and then we would support Thailand.”