The Currency Peg Was Ripped Apart

BAHT selling pressure on Tuesday, May 13, 1997 escalated, sending the Thai currency off the fixed rate again that morning trading session.

Rerngchai Marakanond, the Bank of Thailand governor, chaired a meeting that morning. It was agreed that the Banking Department should be authorised to continue to intervene in the foreign exchange market to shore up the baht.

Before the Exchange Equalisation Fund fixed the dollar/baht rate that morning, the market traded the baht at Bt25.94 against the dollar. When the EEF fixed the rate at Bt25.88, the market still traded it off to Bt25.925-93.

It was a seesaw battle. There were also rumours that undermined the confidence in the baht.

The central bank intervened through four local commercial banks, which succeeded in bringing the exchange rate down to Bt25.905 at noon. After that the exchange rate strengthened a bit.

The central bank contacted the Hong Kong Monetary Authority to helped it prop up the baht by US$500 million at a rate between Bt25.92-25.93 as approved by the Thai side earlier.

When the London and the New York market opened, the exchange rate continued to weaken, forcing the central bank to intervene periodically. The Bank of Thailand reiterated its determination to fix the baht as announced on Friday 9, May.

Liquidity in the system began to dwindle. Demand for money in the short-term money market rose. There was high demand for liquidity in the repurchase market.

The repurchase rate and inter-bank rate stood at 11.50 and 11.75 per cent respectively compared to 9.75 per cent and 9.0-10.0 per cent on Monday, May 12, 1997.

The interfinance rate went up to 14.0 per cent and 16.0 per cent, compared to 13.0-15.0 per cent a day earlier. The swap premium also rose by 0.2-0.3 satang for T/N in the morning to 0.4-0.55 satang in the afternoon, reflecting the baht interest rate of 13.8 per cent.

Phaiboon Kittisrikangwal, the chief treasurer of the central bank, reported that his department intervened with US$2.743 billion. It sold outright forward contracts by US$870.0 million. It did the buy-sell swap by US$5.395 billion.

Of this, swap T/N (one day) for US$35.0 million; seven-day swaps for US$730.0 million, one-month for US$335.0 million, three-month swap for US$1.71 billion, six-month swap for US$1.595 billion, one-year for US$990.0 million.

Phaiboon Kittisrikangwal

Phaiboon said in his note that the objective was to "resist and relieve the speculative pressure, which has been persistent."

Rerngchai noted back: "Have informed the finance minister by telephone to Fukuoka in Japan on the situation and a need to defend the baht because the otherwise the financial system of the country would be damaged and would never be restored."

Dr Bandid Nijathaworn, the director of the Banking Department, reported about the details of the intervention that day slightly different from Phaiboon's.

He reported to Siri Garnjaroendee, the assistant governor, that the central bank intervened by US$2.6 billion in the spot market, US$870 million in the forward market and swap T/N to one year for US$5.2 billion. The EEF also intervened by US$688.4 billion.

Black Wednesday

The fiery of the baht attack on day four of the battle climaxed on Wednesday, May 14, 1997. The size and the scale of the attack sent a sharp shiver down Bandid's spine.

 He alarmingly ran up to inform Siri about the hail of the currency attack unseen before in his life. He told Siri that the speculators were trying to break apart the currency peg. He went pale and his hands were shaking.

Bandid Nijathaworn

He was holding a highly confidential report on the estimated size of the baht attack on that day in his hands.

On that single day the speculators bet a staggering US$10 billion (about Bt260 billion) against the Thai currency. This amount represented more than half of Thailand's total money in circulation or the M1 money supply, which stood at Bt425.3 billion baht as of the end of April 1997.

The attack was like dropping a nuclear bomb on Thailand.

If the central bank stood at the sidelines, the payment system would collapse since the attack effectively drained Bt260 billion out of the system all in a sudden.

In this crisis situation, Dr Chaiyawat Wibulsawasdi, the deputy governor, believed that it was too late for the central bank to budge.

During the turmoils of the currency war, nobody knew the size of the attack, not until the dust settled down or when clearings were completed.

Phaiboon and his dealers just punched back crazily, matching the attack dollar for dollar. In doing so, he pumped the baht back into the system to save the payment system.

Trying to hold the line, Phaiboon sold out a massive US$8.9895 billion into the spot market. (Bandid's figure of spot market intervention was higher-US$9.049 billion.)

In addition, Phaiboon sold outright forward by US$400 million to defend the baht in the forward market, which was aimed at preventing the swap premium from rising sky-high. He was also engaged in the buy-sell swap by US$600 million, of which US$350 million represented one-month swap, US$50 million three-month swap and US$200 million one-year swap.

Phaiboon ended up draining his stockpiles by US$10.989 billion on that single day alone!

This amount was more than enough to build a mass transit system throughout the traffic-congested Bangkok.

The Exchange Equalisation sold the dollar out by US$887.1 million from its window.

Rerngchai tried to mobilise the regional central banks to come to Thailand's rescue in an unprecedented coordination. The news was intentionally spread into the foreign exchange market that Bank Negara Malaysia, Reserve Bank of Australia, Monetary Authority of Singapore and the Hong Kong Monetary Authority were intervening in the foreign exchange market to defend the Thai currency.

However, a statement released by the Bank of Thailand on that day only confirmed that the Bank of Thailand and the Monetary Authority of Singapore jointly intervened in the foreign exchange market to stabilise the baht.

The statement said this concerted operation was aimed at stemming excessive speculative attack, which might lead to disorder in the Thai and other regional financial markets.

As it turned out, the Hong Kong Monetary Authority spent out about US$500 million in this intervention. The Monetary Authority of Singapore also showed its kind heart by spending an equal US$500 million to shore up the baht.

Other regional central banks were not reported to participate in the concerted intervention. The Monetary Authority of Singapore did not comment on its decision to come to Thailand's rescue beyond a joint statement issued with the Bank of Thailand.

The statement said: "This concerted operation is aimed at stemming excessive speculative activities which may lead to disorderly conditions in the Thai and regional financial markets. Other appropriate measures will be taken as necessary."

The attack was so heavy that the hedge funds’ and the central bank’s positions were locked against each other in a zero sum game.

The speculators sold the baht for the US, while the BOT sold the dollar for the baht. The attack sent the baht in the spot rate from Bt26.00 to Bt26.65 against the US dollar. The BOT intervened fiercely and asked for help from the Monetary Authority of Singapore, which would buy the baht at every price.

By mid-night some expected that the speculators had walked away from the market by taking profit every 15-30 minutes because the exchange rate was swinging between 26.00 and 26.65 baht/US dollar.

The following day on Thursday, May 15, 1997 Rerngchai played down the attack by giving the impression that the situation had been improved since Wednesday when the baht opened on the London foreign exchange market at Bt25.88.

The sell-off in the baht on that day unnerved stock investors as well, causing the benchmark stock index to fall to a new six-and a-half-year low. The 4.82 per cent to close at 571.30 on a turnover of Bt6.61 billion.

At one point the SET index was down 33.38 points, or 5.6 per cent, to 566.86 points.

Bhokin barked out

Inconsistent statements from the prime minister and his right-hand man, Bhokin Polakula, resulted in another day of confusion over the status of Amnuay. Chavalit told members of the Board of Trade that Bhokin would act as secretary of an economic coordinating team. This team would meet three times a week with the prime minister acting as chairing.

He was responding to confusion as to who actually was in charge of the economic management.

Bhokin Polakula

In a radio interview that morning, Bhokin came out to openly criticised Amnuay for failing to follow up on the key economic measures, particularly the property rescue programme. "The Cabinet has passed five or six property resuce measures but none has yielded any results," he complained.

Sornchai Montreewat, secretary to Amnuay and concurrently deputy prime minister, naturally came out to defend Amnuay. He denied that his boss was resigning, adding that such a move would aggravate the crisis of confidence in the economy.

Sornchai said Amnuay spoke over the phone with the prime minister for about 10 minutes and that relations between the two men were "100 per cent, without problems."

Amnuay told Reuters in Tokyo that he was confident of his future as finance minister. He said Thailand was committed to maintaining baht stability and its central bank would succeed in turning back any further market attack on the currency.

Dr Supachai Panitchpakdi, former deputy prime minster and an oppositon Democrat MP, said rumours about the dismissal of Amnuay were not good news since the finance minister was the one who directed the macro-economic policy. He called on the government to spell out precisely what it would do to prevent a deficit in the current state budget for the first time in 10 years.

A budget deficit would spell further trouble, producing a possible triple deficits for Thailand, along with the current account and the balance of payments deficit.
  
A Letter from Camdessus

Incidentally, Michel Camdessus, the managing director of the International Monetary Fund, sent a letter to Amnuay. He urged Amnuay to implement the package of financial stabilisation as laid down by the IMF commission, which reviewed Thailand's economic and financial conditions in March 1997.

In that letter Camdessus still showed his reservations as to what the Thai authorities should do with the currency regime.

By early afternoon the attack suddenly subsided, to the surprise of Rerngchai and his team. By that time, the central bank already went broke.

The hedge funds and the speculators were also caught by surprise. They slowed down the pace of hammering the baht. They apparently had misread the central bank warriors' resolve to fight till their last breath.

They thought that they had ripped apart the currency peg. And they knew that they had inflicted enormous casualties on the target. But how great?

Inside the Bangkhunphrom headquarters, Rerngchai and his aides were looking at each other startlingly as if the end of the world were coming.

Reserves were almost depleted from the defence. "Everybody was in a state of shock. Somebody almost cried," Rerngchai recalled.

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