Licking the Wounds

In his office that morning of Thursday, May 15, 1997, Rerngchai summoned Dr Chaiyawat Wibulsawasdi, Siri Garnjaroendee, Thanya Sirivedhin, Bandid Nijathaworn, Praphai Suwannarat, who was Bandid's deputy, and Phaiboon for a crisis meeting.

He would like to hear some immediate policy options.

Bandid was extremely nervous and expressed fears about a possible collapse of the currency peg system since Thailand was singled out for the global attack.

He told the governor that he would not be able to sustain the defence since the attack was so fierce and overwhelming.

After informing the meeting about the scale of the attack and the results of the intervention over the previous day, Bandid tried to retain his composure. He noted that the Wednesday attack was most severe, arising from the persistent rumours that the central bank would abandon the fixed exchange rate system. Frantic dollar buying ensued.

Bandid complained that it was not fair that Thailand had to go to war alone against the global financiers. In real war, a country may ask for sympathy or help from the United Nations. But in the currency war, there is no organisation to appeal to. The International Monetary Fund would not tamper with the free flow of the global financial markets.

Bandid suggested that Thailand flashed a message through the dealers' screens worldwide to condemn the speculative attack against the Thai currency. But this wild idea was put on a hold.

Later he did work on a private appeal to Alan Greenspan, the US Federal Board chairman, since the big-time speculators were largely US hedge funds.

Rerngchai saw the draft and passed it on to Dr Amnuay Viravan, the deputy prime minister and finance minister, who approved it.

Greenspan replied, but his message was clear: the attack against the Thai currency was purely a market force at work, which lay beyond the jurisdiction of any regulatory agencies.

Alan Greenspan

Chaiyawat's stand was that it would be impossible to abolish the currency peg system while the baht was in a middle of the attack because it would further add turmoil to the market. He suggested that the Bank of Thailand raise the interest rates sky-high to punish the speculators and mobilised the regional central banks to help out Thailand.

Chaiyawat did go to the Bank of Thailand's dealing room to boost the morale of Phaiboon and other dealers because the situation was very critical. Shaken, they all needed encouragement and some soothing words.

While the currency war was going in full scale, some foreign companies or foreign funds also would like to close their positions. They, too, were out to grab the dollar and sold the baht.

Although the Exchange Equalisation Fund quoted its mid-rate at Bt25.86 against the US dollar, the market traded the Thai currency off the target at Bt26.035. This reflected widespread panic among the investors and the enormous pressure from the attack.

The situation reached critical level

Bandid also told the meeting about his informal meeting with his staff, Praphai and Phaiboon, on the evening of May 13 to review the crisis situation over the previous five trading days. They reached a conclusion that the situation was of grave concern and had already reached critical level.

They also understood that the scale of the attack reflected the speculators' determination to get a quick and decisive victory. And they sensed that the speculators were aiming to break apart the fixed exchange rate system, which would automatically lead to a devaluation.

What were some of the themes that the hedge funds speculators were trumpeting around in the financial markets?

Bandid and his staff concluded that the hedge funds and speculators were banking on worsening shape of the country's economic conditions, plus rumours of the political instability and a possible change in the foreign exchange rate system.

They realised that the central bank's intervention, buoyed by support from the Hong Kong Monetary Authority, succeeded only to a certain degree to curb the baht fall.

But the financial markets had demonstrated that they did not have any respect or any fear of the regional central bankers at all, Bandid admitted.

Bandid's assessment of the domestic market was that the impact of the currency war would be limited. The domestic rate shot up slightly. Unlike their foreign counterparts, Thai companies did not get panicky. They hardly knew what was actually going on.

Rerngchai told the meeting that he had constantly informed Dr Amnuay Viravan, the finance minister, who was attending a conference of the Asian Development Bank in Japan, about the development of the foreign exchange crisis.

He continued to believe that it was necessary to look after the stability of the baht. He said he would personally inform the prime minister about the matter on the weekend.

Rerngchai urged Bandid to try to contain the turmoil until Friday, May 16, mixing the intervention with the high interest rate policy. In the meantime, he would urge the Monetary Authority of Singapore to come to Thailand's side by intervening in the offshore market to squeeze the speculators.

Further regional mobilisation

In the end, the meeting agreed to assign Bandid to prepare the administrative procedures to seek additional cooperation from the Reserve Bank of Australia, Bank Negara Malaysia and Bank Indonesia to rally for the Thai side in the currency war.

Rerngchai or Chaiyawat would be the one who made the contact. The regional central banks would be asked to intervene in the offshore markets on Thailand's behalf on the following day of May 15 if the attack continued.

However, the meeting urged the governor to report to the finance minister and the prime minister about this cooperation because it would have regional and foreign policy implications.

On that day Rerngchai and his aides also discussed three immediate options to deal with the crisis. In the first option, the meeting focused on the consequences of the markets if the Bank of Thailand was to refrain from intervening to shore up the baht.

The consequences would be clear. The commercial banks would rush to buy the US dollar from the Exchange Equalisation Fund and sell it for a handsome profit in the markets that had already traded the baht significantly off the daily trading band.

In that scenario, the Exchange Equalisation Fund, which fixed the baht against the US dollar on a daily basis, would have to sell out the dollar massively, resulting in a quick drain of the foreign exchange reserves. If reserves were to dwindle significantly, more panic would ensue to add on the pressure of capital outflow.

Rerngchai also considered an option of shutting down the window of the Exchange Equalisation Fund. In that case, the Bank of Thailand would be ready to adopt a new foreign exchange regime.

Chaiyawat expressed his strong objection against closing down the Exchange Equalisation Fund. Nor did he show any support for an adoption of a new currency regime.

Besides, the central bank had never done any serious homework on a new currency regime, which would involve a host of technical measures. More time would be needed for preparation. The meeting agreed, however, that if there were no foreign exchange intervention, liquidity would be extremely tight.

In option No. 2, the central bank would use its reserves to intervene in the onshore and offshore markets to prevent the US dollar/baht rates from veering off significantly from the Exchange Equalisation Fund's mid-rates.

This might restore a measure of confidence and prevent the interest rates in the money market from climbing too high. The intervention would focus on the foreign exchange swap market, where settlements are due at a certain time in the future.

By doing so the pressure of the outflow from the reserves would be passed on to the future. Exchange Equalisation Fund's intervention in the spot market would result in an immediate draining of reserves.

Chaiyawat and Bandid shared the same position. They believed that Thailand's problems had to do with the economic fundamentals rather than the currency problem. If the current account deficit improved, exports picked up, the fiscal and monetary policy got tightened, the real estate sector and the financial institutions were tackled systematically, confidence would be regained and capital would flow back to Thailand.

A restoration of confidence would force the speculators to unwind their short-baht positions. Then the central bank would have new reserves to reduce the burden of its swap obligations.

That was a big misreading of the situation.

However, Bandid admitted that the currency intervention in the foreign exchange swap market would represent only temporary measure to buy time for confidence to be restored.

Option No. 3 involved a study of a new currency regime. This would involve a combination of Option 1 and Option 2, which would be under the responsibility of the Economics Research Department.

A new currency regime must be studied as quickly as possible.

After this general agreement, Dr Chaiyawat undertook to contact the neigbouring central banks to help Thailand. On that day, Chaiyawat asked the Hong Kong Monetary Authority shore up the baht, which it agreed to spend US$500 million.

The following day, on May 16th, 1997 he would also ask the Monetary Authority of Singapore to come to the baht's rescue. Rerngchai would use his Japanese contact to call for assistance from the Bank of Japan.

The meeting also agreed to allow the Banking Department to spend US$5 billion to prop up the baht, allowing the currency to move five to 10 satang higher than the mid-rate.

If this amount was not enough, Bandid should inform the governor immediately.

Intervention without limits

Later that afternoon at between 16:30-17:30 hours, Rerngchai attended another crucial meeting. This time it was held in Bandid's room. Chaiyawat, Siri, Thanya, Bandid, Praphai and Phaiboon were present.

In the immediate term, the meeting agreed that the Banking Department should continue to intervene -- without any limits --in the foreign exchange market in the evening and the following day until the US dollar/baht trading came within the band of the Exchange Equalisation Fund.

More importantly, the meeting concluded that the exchange rate system and the basket of currencies must be maintained at all cost to restore confidence to the foreign exchange regime. It was simply the best option available for the central bank at the moment.

The Banking Department was assigned to closely follow the development in the New York market throughout that evening and night.

If necessary, interest rates might be allowed to go up to 100 per cent. But this should be a temporary measure to defend the baht while the financial institutions must have adequate access to liquidity.

The meeting agreed that liquidity would be released into the repurchase market, where financial institutions borrow short-term money to adjust their liquidity positions, the swap market and the Financial Institutions Development Fund. But each application for liquidity would be carefully screened to make sure that the money was really needed.

Besides, the central bank would like to make sure that the financial institutions would not borrow the baht to speculate in favour of the US dollar.

In this regard, the central bank's examiners and supervisors of the financial institutions had been advised to step in to look after their transactions of the financial institutions. As for the impact on the swap premium and the stock market, the Bank of Thailand would make necessary clarifications to ensure that the public did not get panic.

Throughout that evening and night Phaiboon and his dealers intervened in the London and New York markets heavily to keep the baht within the trading band. They would allow the exchange rate of the baht to run away before intervening in the closing sessions in order to save the reserves.

The objective was to manipulate the exchange rate so that it would not close too high to create panic before the markets in Singapore and Hong Kong opened in the following day.

"From a pure fundamental point of view, there's no need for Thailand to do something immediately on the currency," said Bernhard Eschweiler, an economist with JP Morgan Inc in Singapore, who wrote his report during that time. "But from a market point of view Thailand is clearly vulnerable." The attack on the baht amounted to "a big bang on the door by the speculators who smell blood."

It was not until Friday May 16, 1997 that Rerngchai had time to officially approve Phaiboon’s staggering US$10-billion transactions. He noted in Phaiboon's transaction report that he had directly informed Amnuay, who was attending an Asian Development Banking meeting in Fukuoka, Japan, about the currency intervention.

He later also reported to the prime minister, to whom he cited about a need to intervene to protect the country's financial system and to "prevent the great damages that could happen if the currency peg system was allowed to collapse."

The Bank of Thailand's net foreign exchange reserves fell to US$2.5 billion.

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