The First Shot Was Fired in London

Day one of the decisive battle was on Thursday, May 8, 1997. The hedge funds and international money managers waited for three months after the St Valentine attack to launch the new battle.

Dr Surasak Nananukul, chief advisor of the prime minister who headed the economic advisory team at the Baan Phitsanulok, tipped reporters about his important morning meeting with the prime minister.

He was extremely unhappy with the pace with which Dr Amnuay Viravan, the finance minister, and Rerngchai Marakanond, the governor of the Bank of Thailand, had been tackling the financial and foreign exchange crises. Armed with an economic rehabilitation plan of his own, he said he would like to make an important announcement the following day.

Surasak Nananukul

The foreign speculators began to make their presence felt more painfully to the Thai banking authorities. After the foreign exchange market in Bangkok had been closed on that day, there were unusual movements of the baht in the London market.

Between Bangkok and London, it is a six-hour time zone difference. The speculators launched their attack at about 5:15 PM Bangkok time, hoping to rip apart the currency peg system. They bought up the US dollar and sold the baht frantically to create a seismic panic.

The attack sent the baht into a tailspin. The baht/US dollar exchange rate was pushed up by 10-12 satang above the central bank's mid-rate of Bt26.05.

The attack would continue dramatically in the New York market and the Asian markets in the following day to complete a global cycle. Speculators from three continents - Asia, Europe and the United States – were railroading the Thai currency.

Thus began the truly hi-tech currency war, fought through the computer screens in the dealing rooms. Winners would take all.

Earlier that afternoon of that day Rerngchai issued a four-page statement to defend his leadership.  Apparently, he was hitting back at charges of some local newspapers, which called for his removal because he was incapable of tackling the economic crisis.

He understood that the attack against him was politically motivated.

The governor staunchly defended his record over the past 10 months during which he attempted to keep the central bank independent from political meddling. Among his actions he cited included his decision to adopt voluntary retirement after serving the office for four years and his reliance on teamwork to implement the monetary policy, supervise the financial institutions and look after the Bank of Thailand's investment policy.

As a sign of his attempt to guard the Bank of Thailand's independence, Rerngchai said he had politely brushed aside a request by Banharn Silapa-archa, the former prime minister, to hold a Cabinet meeting at the Bank of Thailand headquarters.

Allowing the politicians to set foot on the Bank of Thailand would amount to a kow-tow to the political influence. During the tenure of Governor Vijit, Banharn held the first-ever Cabinet meeting at the central bank.

Rerngchai went on to defend his record by indicating that he had fought hard for the government to cut its fiscal spending, particularly the military budget, and tackle the current account deficit.

Rerngchai said he also tried to raise the ethical standards of the Bank of Thailand officials by issuing fresh guidelines and requesting that all the monetary officials resign their directorships in private companies to avoid inviting public criticism.

"I am willing to listen to all criticism based on sincerity, but not on prejudice or untruthful information in leaflets which lack ethics," he said. "I am not attached to the highest objective of my career, or more importantly as a second-generation scholarship student of Dr Puey Ungphakorn (considered the Father of the Bank of Thailand)."

His statement to protection himself, however, fell on deaf ears.

After his self-defence, Rerngchai would be facing a real war, launched against the baht from half the globe away. That morning the Exchange Equalisation Fund quoted the Bt26.05 mid-rate. The spot rate was traded at Bt26.067 and the premium for the tomorrow/next period (three days) stood at 0.45-0.55 satang.

The baht attack in London to New York sent it off the mid-rate by 10-12 satang. The overnight interbank rate, the rate at which banks lent money to each other, was standing at a normal level at 8.25-9.50 per cent a year.

At that point time the net foreign exchange reserves of the central bank stood at US$24.2 billion. This level was low enough for Rerngchai and his defence team to do something about the foreign exchange regime in order to preserve the foreign reserves.

But they elected to keep on fighting.

In the middle of the battle, Bandid tried to assess the critical situation. He wrote his report in a hurry.

"This time the speculators chose to attack the baht in the evening of Thursday, May 8 after the Bangkok market was closed. They bought the dollar and sold the baht substantially in London, pushing the spot rate up by 10-12 satang above the mid-rate as quoted by the Exchange Equalisation Fund. The attack continued in the New York market and created panic among the treasury dealers and general investors," he wrote.

Bandid Nijathaworn

On that day, Paiboon Kittisrikangwal, the chief treasurer of the central bank, intervened in the tune of US$1.23 billion in the foreign exchange swap market in order to prevent the swap premium from rising too high.

Of this, the buy-sell swap contracts amounted to US$1.18 billion, of which US$1.07 billion accounted for six-month swap contracts and US$110 million for one-year swap contracts. He also did sell-buy swap (tomorrow/next or three-day settlement) for US$50 million.

"The speculators began to rock the market in another round by trying to push the swap premium up, so we stepped in to contain the situation to prevent a panic,'' Paiboon noted in his report, dated May 9, 1997, about his May 8 intervention activity.

Defending the baht at this juncture involved four key individuals - Rerngchai, Siri Garnjaroendee, the assistant governor, Bandid and Paiboon in hierarchy order. Most of the other central bank officials were not kept fully informed about the scope of the defence, which was a top secret operation.

In a routine practice, Paiboon would submit the reports of his intervention activity to Bandid, his immediate boss, for approval. Bandid would then hand the report over to Siri, who would then pass it on further to Rerngchai.

Amnuay would not receive the daily reports on the foreign exchange intervention.

Rerngchai had a chance to read this report the following day. He formally signed his name in approval of the intervention activity.

He had two points to make: "First, approved. Second, it is necessary to defend the baht because other senior management of the central bank, including Chaiyawat, Siri, Bandid and others, have been consulted. It is absolutely necessary (to defend the baht) without any question. Have already informed the finance minister."

Day two of the battle
 
Day two of the battle saw the speculators try to apply substantial pressure on the baht in the New York market, so that when the Asian market opened in the following day, the traders and dealers there would be greeted with the turmoil. And the turmoil they did experience with another shock on Friday, May 9, 1997.

The attack sent the baht to veer four to five satang above the mid-rate of Bt25.99 at 7:00 AM. Half an hour later, the baht exchange rate climbed further by nine to 10 satang above the mid-rate, prompting the Bank of Thailand to step in with the intervention.

Paiboon intervened at the level of Bt26.08, at which rate it was 10 satang above the mid-rate. (Memorandum No. 478/1997, the Banking Department, the Bank of Thailand, May 12, 1997).

Paiboon Kittisrikangwal

"We sold the dollar through the agents, chasing the rate down to the lowest level at Bt26.015 by boon, including defending in the forward market. This helped stabilise the spot rate and the swap premium in spite of the substantial pressure," Paiboon noted.

The Bank of Thailand also intervened fiercely in the offshore markets, mainly in the Singapore and Hong Kong markets, to keep the spot rate from veering too significantly above the mid-rate and to prevent the swap premium from rising too high. Realising that the market force was formidable, the Bank of Thailand tried to save some of its stockpiles and minimise the casualties.

Its strategy on that day was simply to reduce the volatility of the baht exchange rate instead of trying to bring the exchange rate back to the trading band. The baht was fluctuating at around Bt26.02.

In the evening, the Bank of Thailand decided to extend its intervention to the London and New York market, exchanging bouts with the speculators in their own turf. (Memorandum No. 379/1997, Banking Department, the Bank of Thailand, Page 2.)

At the end of the session on May 9, the baht in New York was quoted five to six satang above the mid-rate.

The US dollar buying pressure inflicted heavy casualties on the Bank of Thailand's foreign exchange reserves. On that single day, the Bank of Thailand was soaked with blood in its eyes, after it had spent a total of US$6.08 billion to defend the baht.

The Exchange Equalisation Fund also sold out the US dollar by US$105 million. Most of the intervention took place before noon.

It was not until Monday, May 12, 1997 that Paiboon had time to complete his report on the May 9 intervention. He reported a break-down of his intervention activities. US$3.013 billion went to the intervention in the spot market. US$2.84 billion was sold outright in the forward market. US$1.10 billion was spent on the buy-sell swap contracts, of which US$640 million accounted for six-month swap contracts and the remaining US$460 million for one-year swap contracts.

Moreover, Paiboon also did the sell-buy swap for the tomorrow/next (one day) for US$1.367 billion. (Memorandum No. 478/1997)

Rerngchai also noted that on the evening of May 9 he informed Amnuay over a need to defend the baht and had got support from him to continue the baht defence.

Altogether, the foreign exchange intervention from the end of April to Friday, May 9 resulted in the Bank of Thailand's facing a rundown by US$700 million. This sent the foreign exchange reserves down to US$36.6 billion.

But when the net foreign exchange swap contracts were taken into account, the net foreign exchange reserves fell to US$17.74 billion.

Did Surasak get a blessing from the prime minister?

As promised on that day, Surasak held a news conference at the Central Ladprao Hotel. He lashed out at Amnuay for his failure to stem the deterioration of the economy. Surasak had no access to the Bank of Thailand’s foreign intervention activity at all.

He said he had come up with a better economic rehabilitation plan. Surasak's radical departure from his unusual discreet style of working for the prime minister raised suspicions that he might have Chavalit's blessing to put pressure on Amnuay.

However, the event turned out to be a low-key critique, although it increasingly reflected a rift in the coalition government over the course of managing the economic crisis.

The market was closed for Saturday, May 10 and and Sunday, May 11, 1997.

Fed up with the tremendous political pressure at home, Amnuay was leaving for Fukuoka, Japan to attend a conference of the Asian Development Bank. Traditionally, a deputy finance minister would participate in the Asian Development Bank conference. But Amnuay elected to go instead to avoid facing the political pressure at home, where he was blamed for failing to put the economy back on track.

Amnuay Viravan

A political back-stabbing was under way in earnest to remove Amnuay. The baht general would be away during the currency battle, which climaxed in the following week. He would not be back until May 16 after the battle subsided.

Before boarding the plane, he shrugged off speculation about his possible removal, saying it was a non-sense to pay attention to rumours.

When a reporter asked him about Surasak's criticism of his management of the economy, Amnuay simply said: "Who's Surasak? I don't know him."
 
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