The Six-Day Battle

BETWEEN Thursday May 8 and Friday, May 15, 1997 – with May 10-11, 1997 off for the weekend -- the hedge funds and foreign speculators determined to slam Thailand's currency peg system into pieces. Lurking at every corner of the world's financial centres, they rolled out their arsenals and took aim at the baht.

"They intended to kill us on spot. We could not do anything, nor did we know when the attack would take place. We just stood there like a big target in the open field," Rerngchai recalled. He was speaking from his Thonburi condo.

The attack would create a big hole in the currency peg, which would collapse a month and a half later.

Since November and December 1996 there had been growing threat to the currency peg from the attack. Every time, however, the Bank of Thailand appeared to manage to put the crisis situation under control.

In the February 1997 battle, the Bank of Thailand managed to contain the turmoil through its fierce and resolute intervention. It seemed that the foreign guerrillas were taught some lessons.

Exactly three months afterward, the pirates of global finance would transform themselves into the more disciplined armies. They waited patiently to re-launch the strike, hoping for a quick, decisive victory this time.

The middle of May 1997 would be a perfect timing to launch the attack. For at that time the Thai central bank would drop its guard to unwind its forward contracts, most of which came with a three-month maturity established during the February defence.

Dr Amnuay Viravan, the finance minister, was already in big trouble politically; any signs of his weakness would mean that the government lacked a commitment, and a political consensus, to defend the currency.

Amnuay Viravan

The asset quality of the banks and the finance companies were deteriorating, with analysts expecting the non-performing loans to hit 20 per cent of the total loans that year. This high non-performing loans level meant that a strong rehabilitation plan would be needed to revitalise the financial system.

It would also include a credible plan to shut down the insolvent financial institutions and recapitalise the more viable institutions.

Without a systematic plan to deal with the systemic banking crisis, there would be a flight from the local currency to the US dollar. If the public had doubts in the health of the financial institutions, they would withdraw their money even in the sound ones.

A capital flight would complicate the health of the financial system, forcing the banking authorities to keep interest rates at an extraordinary high level and to print money to keep the financial institutions afloat.

The pirates of global finance

The hedge funds were aiming to kill a tiger. The Bank of Thailand's No. 1 enemy at that time was Julian Robertson of the Tiger Fund-not George Soros of the Quantum Fund as most people tended to believe.

According to a former Thai central bank official, hedge-fund operator Robertson engineered the attack by betting US$3 billion against the baht. Quantum Fund, which had a war chest of about US$12 billion and was established more than 25 years ago with a general recognition as having the best performance record in the world, took total short baht positions of about US$700 million.

A key member of the Bank of Thailand's baht defence team believed that Soros' short baht positions were in billions. The key hedge-fund operators, who got involved in the speculative attack, were identified as the Soros Funds' Stan Druckenmiller and Rodney Jones; Tiger Funds' Julian Robertson, Bruce Kovner, and Lee Cooperman. Other operations and dealers included Goldman Sachs, JP Morgan, Citibank, BZW.( The Wall Street Journal (Friday and Saturday, May 22-23, 1997, Page 1.)

Julian Robertson

JP Morgan was one of the Thai central bank's external fund managers of reserves, along with UBS Investment Management, Mercury Asset Management and Deutsche Bank Asset Management. Under strict official guidelines, which were not aimed for maximising profits, these institutions together managed about US$300 million of the central bank's reserves. (James Sinclair, "The Battle of the Baht," Euromoney, September 1997, Page 102-104.)

At one point, JP Morgan held liquid baht assets by US$30 billion, turning it into one of the biggest baht players. Bandid, the then director of the Bank of Thailand's Banking Department, also identified Morgan Stanley as one of the speculators in the pack. ( Minutes of the Ad Hoc EMEAP Deputies' Meeting, the Bank of Thailand, May 24, 1997.)

By the middle of 1997 Thailand was in big trouble because of its over-leveraged economy. Its external debts hit US$85.07 billion. This amounted to about 45 per cent of the combined output of goods and services, or the gross domestic product (GDP), which stood at US$200 billion.

The public sector's foreign debts were manageable at US$16.95 billion, almost all of which were long-term. The picture was gruesome for the private sector, which had saddled itself with US$66.393 billion in foreign debts dominated largely in US dollars.

Of the total private external debts, US$28.184 billion (33.82 per cent) were long-term borrowings through the offshore banks under the auspices of the Bangkok International Banking Facility (BIBF), US$7.046 billion (8.45 per cent) for short-term borrowings through the BIBF, US$22.25 billion (26.7 per cent) for long-term borrowings of non-bank Thai companies, US$8.914 billion (10.69 percent) for short-term borrowings of non-bank Thai companies.(Dr Olarn Chaipravat, "Thailand's Foreign Debt Structure,' private paper, June 2, 1997.)

With this heavy debt burden, a devaluation would destroy the balance sheets of the Thai corporates and financial institutions. Altering the foreign exchange regime in the middle of the crisis would also amount to a de facto devaluation since the only way for the Thai currency was down.

A devaluation by one baht would increase the country's debt burden by another Bt85.70 billion. It would spell doom to the Thai corporate and financial sectors. This was the most worrisome aspect from a risk of currency devaluation hanging on the back of the mind of Dr Chaiyawat Wibulsawasdi, the deputy governor of the Bank of Thailand.

So Chaiyawat, who cast a long shadow over the Bank of Thailand's baht defence strategy, had been strongly opposing against any attempt to adjust the foreign exchange regime in the middle of the financial crisis.

Chaiyawat Wibulsawasdi

At that point, the hedge-fund operators and international money managers had pressured Rerngchai and his baht defence team into a tight corner. The Thai side was facing a dilemma.

The hedge funds thought that if the Bank of Thailand decided to fight, it would be completely routed; and that if it decided to give in, it would hurt the corporate sector and the financial system.

"The speculators guessed that the Thais would rather fight than devalue. Devaluation would hurt the elite, who would watch principal and interest payments soar for their dollar-denominated loans. The alternative to devaluation was a further hike in interest rates, but that would produce a flood of bankruptcies and further weaken a banking system that was already in trouble because lax government supervision had allowed their banker cronies to ignore capital requirements," Time magazine wrote in its September 3, 1997 edition.)

The attack took place while the political and bureaucratic machines in Thailand were floundering. Amnuay, in particular, was a target for removal by the Chat Pattana Party, one of the coalition partners. Even the politicians in the New Aspiration Party's wing also would like to kick him out.

Although Amnuay was close to the prime minister and had known him for about 10 years, relations between the two were getting sour. Amnuay came aboard the Chavalit government on the New Aspiration Party's quota, along with other non-MP colleagues Dr Narongchai Akrasanee, the commerce minister, and Somphob Amatayakul, the deputy industry minister.

Narongchai was a well-known economist and chairman of General Finance & Securities Public Company Ltd, which was among the first lot of insolvent finance companies to be shut down by the banking authorities. Somphob was a former top executive of IBM Thailand Ltd.

Amnuay was head of the economic dream team, formed by Chavalit, who had pledged to focus on tackling the economic ills after he won the general election and came to power in November 1996. But the dream team looked like a nightmare team.

The honeymoon period was long over. Members of the Chat Pattana Party, the second largest coalition partner which controlled 52 seats, were picking up their knives. The Chat Pattana, led by former prime minister Chatichai Choonhavan, made no secret its ambition to take over the management of the economy.

The Thai-style politics would further aggravate the cause of the Bank of Thailand's baht defence.          With uncertainties and a possible collapse of a merger between the Thai Danu Bank and Finance One Public Company Ltd, investors further lost confidence in the Thai financial system.

The foreign speculators understood that the banking authorities lacked a credible plan to rehabilitate the financial system. The Chavalit government was also losing its popularity and support from its failure to tackle the economic crisis.

The timing was perfect to launch the attack. The baht would come under siege.

On Tuesday 6, 1997, two days before the battle started, a psychological warfare was launched as a fore shadow. Rumours were swirling around the London and New York markets that a widening of the US dollar/baht trading band was in the card.

Stories over a possible reshuffle of the finance minister and the prime minister's decision to take over the management of the foreign exchange policy were also circulating in the dealing rooms.

This gave the impression that the Thai foreign exchange policy was in a disarray. At that point, according to Bandid, the Bank of Thailand's net foreign exchange reserves stood at US$24.2 billion.

The Bank of Thailand attempted to prevent the swap premium from rising too high by engaging in the buy-sell swap in the foreign exchange market every day between May 2 and May 8 for a total of US$3.2 billion.

Bandid described the critical situation at that point as follows: "Apart from the abnormal pressure in the foreign exchange swap market, there were signs that the speculators began to attack the baht in another round.

“Rumours were swirling around about a possible widening of the trading band of the Exchange Equalisation Fund and a reshuffle of the finance minister, who objected the baht devaluation policy. The rumours were also aimed at undermining the credibility of the Finance Ministry and the Bank of Thailand, to the extent that the prime minister was rumoured to have planned to take over the management of the foreign exchange regime.

“The speculators began to attack the baht by buying the US dollar and selling Thai baht in the spot market and simultaneously engaged int he sell-buy swap. The speculators would benefit from these activities if they could push the dollar/baht exchange rate up (resulting in a weak baht) immediately in the spot market; and/or push the swap premium up.

“The speculators would make huge profits if they could force the Bank of Thailand to devalue the Thai currency. On the other hand, if the speculators failed to push the dollar/baht exchange rate in the spot market or the swap market, they would incur losses because they would need to borrow baht at a high cost to hold their long US dollar positions." (Dr Bandid Nijathaworn, "Intervention in the Foreign Exchange Market for Baht Stabilisation," Memorandum No. 355/1997, the Banking Department, the Bank of Thailand, Page 6-7.)

What was then the rationale of the Bank of Thailand's baht defence?

Bandid further explained that the Bank of Thailand would counter the buy dollar/sell Thai baht force in the foreign exchange market by selling the US dollar/buying Thai baht in an effort to prop up the value of the baht.

Intervention in the foreign exchange swap market was also aimed for the same purpose. For it the spot exchange rate or the swap premium rose too high, it would lead to a panic among the foreign and local investors.

If confidence in the baht was lost, it would create a stampede with investors rushing to buy the US dollar. Bandid, who was one of the hawkish members of the Bank of Thailand, emphasised a need to continue to staunchly defend the baht.

"The central bank's intervention must be decisive, hitting the iron while it was still hot and intervening at a scale large enough to prevent the exchange rate from rising beyond the normal level that could have eroded investors' confidence," he argued.

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