The Defence Team

The baht came under a fierce attack between 1996 and throughout the first half of 1997. Currency traders make money by speculating on its trends or movements.

The Thai macroeconomic conditions were in bad shape. The current account deficit hit 8 per cent of the GDP. Short-term debts rapidly soared. The property market was overbuilt. The banks and finance companies were facing a deterioration of their asset quality. The financial markets bet that the Thai authorities would eventually abandon the currency peg system, devalue the baht and bring down the interest rates to jump-start exports and the economy.

The Bank of Thailand had been maintaining interest rates at relatively high levels to stem pressures on the currency. This further depressed economic activity and increased pressure on the domestic financial system.

Hedge funds and speculators attacked the baht periodically, believing that the baht would eventually have to be devalued so that interest rates could be lowered out of concern of the economy.

The Bank of Thailand’s foreign exchange policy management was a collective decision. It involved Rerngchai Marakanond, the governor, Dr Chaiyawat Wibulswasdi, the deputy governor and also manager of the Exchange Equalisation Fund. Siri Garnchaorendee, the assistant governor, Tanya Sirivedhin, the assistant governor, Dr Bandid Nijathaworn, the director of the Banking Department, and Paiboon Kittisrikangwan, the division chief of the Banking Department.

There had been little unity among members of this exclusive club. The stature of the Bank of Thailand had already been eroding. Earlier years of success had bred a culture of overconfidence and elitism.

A sense of rivalry

Personally, Rerngchai was not on good terms with Chaiyawat, who was more qualified than the governor in macroeconomic matters. During the tenure of Vijit Supinit, Rerngchai was kept inactive. He stayed at the note-issuing department for seven years, practically playing no role in any major policy decisions of the central bank.

Rerngchai Marakanond

When Rerngchai succeeded Vijit Supinit in July 1996, the macroeconomic conditions of the country had already been deteriorating. Intellectually, Rerngchai would be totally unprepared to cope with the financial and foreign exchange crises. Psychologically, he was not equipped for the demanding job.

He rose to the helm due to a bureaucratic system based on seniority instead of on merits. Banharn Silapa-archa, the prime minister, was obliged to appoint Rerngchai as governor because Rerngchai threatened to resign if he did not get the appointment.

Naturally, Rerngchai did not trust Chaiyawat, who was his superior than him intellectually. So he made Siri his top lieutenant. Much to the envy of his colleagues, Siri was entrusted to simultaneously take charge over the Banking Department and the supervision of the financial institutions.

Chaiyawat was not happy at all because his power had been curbed. After Chaiyawat returned to the Bank of Thailand following his brief service as deputy and acting finance minister for the Banharn Administration, Rerngchai asked him what kind of job he would like to do. Chaiyawat said he would prefer to keep his job at the Exchange Equalisation Fund and oversee the Economics Research Department.

“That is fine,” Rerngchai readily agreed.

Chaiyawat Wibulsawasdi

Chaiyawat was one of the country’s top macroeconomists. In fact, macroeconomists were a rare breed in Thailand. Dr Olarn Chaipravat, the president of the Siam Commercial Bank, and Dr Virabongsa Ramangkura, the former finance minister, were the other two notable macroeconomists.

As governor, Rerngchai would automatically acted as commander in chief, personally responsible over the foreign exchange policy. Between July 1996 and April 1997, Rerngchai was in full command. But in the ensuing period, he would be increasingly preoccupied with the crisis of the financial institutions.

Since foreign exchange was not his trade, the governor had an excuse to focus his energy on tackling the crumbling financial sector. Some time in March, he verbally assigned Chaiyawat to look after the baht policy.

As governor, Rerngchai naturally felt insecure to have a technically far superior number two at his side. Chaiyawat felt that he was not treated according to his capability. So during the crisis of the baht, he spent his time to write a book on stamp collection. His pen name is Winnie the Pooh.

Later on when he was questioned as to why he became indifferent while the BOT was roiling in the crisis, Chaiyawat defended his record by saying that he had not been given any important assignments. All the responsibilities were rested upon the governor alone.

However, Chaiyawat could not deny his responsibility. He was at that time general manager of the Exchange Equalisation Fund, or guardian of the basket of currencies system.

The collective decision, as it turned out, evolved into individual judgement over the management of the foreign exchange system.

Siri and Thanya were more inclined to support a more flexible baht policy. Chaiyawat, Bandid and Phaibul thought that they could defend the baht.

The governor went along with the Chaiyawat camp since Chaiyawat was supposed to know best. There would be no devaluation, nor any adjustment of the foreign exchange policy until the financial sector crisis had been resolved.

The Bank of Thailand officials hardly came to grips with the reality that tackling the financial sector crisis would take time.

In one session after the baht attack, Siri asked in the meeting about the value of the baht. Thanya raised all her 10 fingers up in the air behind others’ back for Siri to see.

The baht was overvalued by 10 per cent!

Thanya Sirivedhin

Siri did not dare to look into Chaiyawat's face. What then could he say?

The Rise of Paiboon

The baht defence throughout the first half of 1997 highlighted Paiboon's role, hitherto virtually unknown outside the central bank circle.

His office was small, consisting of a handful of traders under his stewardship. Bright and sharp, he won the central bank's scholarship to study at the University of Chicago.

Before the baht crisis, Phaiboon's career was eventful because the central bank's foreign exchange trading was routine under the fixed currency regime. When the baht was attacked in late 1996, Phaiboon's role became more crucial. He would be picked as the chief dealer of the central bank's foreign exchange operations.

Over the next five months Phaiboon's division, which looked after the liquidity and short-term interest rates in the money market and monitors the foreign exchange markets, would transform itself into a full-scale war machine.

Phaiboon Kittisrikangwal

On December 16, 1996 Rerngchai gave Paiboon a prominent assignment. He circulated a note to the officials at the Exchange Equalisation Fund to notify about Paiboon's promotion.

"From today, any telephone contacts from the commercial banks should be forwarded to the officials of the Banking Department's Analysis Division. Please coordinate with Khun Phaiboon, the division chief of the Banking Department," the internal memorandum said.

Despite his economics background, Phaiboon had relatively little experience in the foreign exchange operations. Throughout the stormy episode, Paiboon hardly realised that his foreign exchange intervention operations, particularly his buying of the currency swap contracts, were no secret to the dealers in the foreign exchange markets at all.

Once the market ended for the day, the clearing of currency positions and contracts informed the markets about the size of the central bank's intervention of that particular day. Standing in the open field, he was trying to hit the enemies that he did not see.

Paiboon got the important assignment because the central bank's strategists agreed that the Banking Department would be responsible chiefly for the baht defence -- not the Exchange Equalisation Fund (EEF), which fixed the baht on a daily basis and acted as a window for foreign exchange transactions.

There was a functional difference between the Banking Department that Bandid headed and the Exchange Equalisation Fund that Chaiyawat was in charge over. Intervention through the Banking Department would appear in the general account of the Bank of Thailand that outsiders could not find out easily.

The Exchange Equalisation Fund was not a good place to keep secrets. Its committee consisted of the finance minister, the commerce minister, the foreign minister, the deputy finance minister and the Bank of Thailand governor. Some of these outsiders could potentially leak out the sensitive currency strategy or reserves positions of the central bank.

Another technical reason was that if the central bank were to limit its defence of the baht only in the spot market -- through the Exchange Equalisation Fund in this case – it would not be able to conceal its intervention operation. For the foreign reserves would run down immediately in the event of any dollar sell in the spot market to prop up the baht.

Since the central bank had no policy of adjusting the foreign exchange regime, it principally relied on the Banking Department to delay this run-down of reserves from spot market intervention. The Banking Department did so by engaging in the swaps contract to temporarily rebuild the reserves, which would buy time until the economic fundamentals could be resolved.

Due to an absence of a well-developed bond market, the Thai financial system would immediately face an excessively tight liquidity situation when the baht came under attack. For when the speculators massively sold the baht for the US dollar, the baht would disappear from the system into the central bank’s account. This would cause interest rates to rise sky-high.

To prevent interest rates from shooting through the roof, the central bank was obliged to pump the baht back into the system by selling the baht for the dollar. But since the currency speculators had no confidence in the baht, they would want their dollar back some time, mostly three months, in the future. So both parties were engaged in currency swap contracts.

In the swap contracts, the Banking Department would use the baht to buy the US dollar into its general account. By doing so, it would pump the baht back into the system to relieve the massively tight liquidity created by the sell baht/buy dollar attack by the speculators.

But at a certain time in the future, which could be one month or three months or six months, the Banking Department would be obliged to deliver the US dollar and buy baht back from its counter-parties, or the speculators.

The cost of doing so was the swap premium, or the interest rate differential between the Thai baht and the US interest rates.

The hedge funds and currency speculators would snap up about 70-80 per cent of these contracts to get hold on the baht, which would be used further as ammunition to re-attack the Thai currency. If they got hold of Bt1 billion, they theoretically could leverage it by 10 times to Bt10 billion to re-launch the attack.

In the currency attack, the speculators must have the currency they have sold short to deliver it afterward. By handing over the baht to the speculators in the forward market, the central bank was engaging in the war that it would surely lose.

The foreign exchange operations

The central bank’s defence system was quickly laid down, however. Phaiboon's office would take telephone calls from the commercial banks, which would like to engage in the foreign exchange activity with the Exchange Equalisation Fund.

The Exchange Equalisation Fund intervened in the market by buying or selling US dollars against the baht within a plus or minus two satang band (one satang = 0.01 baht). It also quoted the mid-rate on a daily basis and intervened in the foreign exchange market between 8:30 AM to 12:00 AM.

After the Exchange Equalisation Fund closed its window for trading, Phaiboon's office would report the trading orders to the Exchange Equalisation Fund detailing each transactions, the names of the banks that involved and the settlement instructions.

Within that same day, the Exchange Equalisation Fund manager, or Chaiyawat at that time, must present a full report to Governor Rerngchai on the Exchange Equalisation Fund's foreign exchange positions, the back-to-back foreign exchange transactions of the commercial banks with the central bank, as well as the settlement instructions.

The original copy of this report must also be delivered to an investment unit of the Banking Department as document for dollar settlements. A photocopy of this report would then be delivered to the accounting unit of the Banking Department as document for baht settlements.

In a typical day, the Bank of Thailand's intervention in the foreign exchange would involve Phaiboon as the chief dealer. At the end of the day he would report the activity to Bandid, who would pass it on to Siri for acknowledgement. Then the report would finally find its way to Rerngchai for final vetting.

A question was raised afterward over the existence, if any, of a check and balance system within the Bank of Thailand's management of the foreign exchange operations. It was clear that apart from these top-ranking officials, others were mostly kept in the dark over the baht defence.

Without a check-and-balance system, it was rather convenient to commit frauds. Strangely enough, a dealer in Singapore knew about the Bank of Thailand’s currency swap positions all the time, an investment banker said (Thanong Khanthong’s interview with an investment banker in Singapore).

“I ask him how he knew about (the swap positions of the central bank). He answered that ‘don’t worry I know it’,” the investment banker said.

Yet the Nukul Commission did not find any frauds involved in the baht defence. The Nukul Commission Report painted Phaiboon as a novice in foreign exchange.

Before taking the assignment as chief dealer of the Bank of Thailand in December 1996, he worked largely in the repurchase market, where he helped the banks or finance companies adjust their liquidity through bond trading or where he determined the short-term baht interest rates.

In the repurchase market, he was king because as the regulator and issuer of the baht, he could move this captive market any directions the Bank of Thailand's policy went at that time.

In the foreign exchange market, however, it was a totally different ballgame. But Phaiboon brought to the foreign exchange market the same mentality he had in the repurchase market. He thought he could corner the foreign exchange market.

As the baht supplier, he believed that the Bank of Thailand would still have an upper-hand against the hedge-fund managers or foreign speculators, who needed the Thai currency to unwind their positions when they sold it short.

But Phaiboon forgot that the baht had been an international currency, which could be freely traded. Daily trading of the baht in the offshore market was about 20 times larger than onshore market. It reached about US$2 billion a day, or Bt50 billion.

Phaiboon frequently met with the foreign investment bankers or foreign exchange traders and hedge fund managers, who came to snoop around and look for information. They were the ones who advised Phaiboon on the currency swaps.

Thailand's foreign exchange reserves of $38 billion were largely US dollars parked at the Bank of Thailand by investors and lenders. Unlike Singapore, Taiwan or Japan, Thailand was a capital deficit country. So the foreign exchange reserves accumulated in the Bank of Thailand's books were formed by capital inflow that exceeded the gap between investment demand and domestic savings, known as the current account deficit.

The reserves were entirely "other people's money". The reserves could flow out any time when the investors or lenders lost confidence or wanted their money back.

But Phaiboon was managing the reserves the way he was managing the baht. It cost almost nothing to him.

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