Time For a Sweet Revenge

FOLLOWING the creation of the split offshore and onshore markets, Phaiboon Kittisrikanwal, the Bank of Thailand’s chief treasurer, had his sweet revenge. He quietly entered the market to squeeze the speculators, forcing them to reverse their positions by spitting out the dollar and buying the baht back to cover their positions.

By the way, Phaiboon was the one who had the unlimited baht supply because the Bank of Thailand printed the baht.

"After the short squeeze began to work, the spot rate collapsed. We began to enter the market quietly by buying back the dollar for the whole day and contiuing to do so in the evening in the New York market," Phaiboon noted in his report.

Phaiboon Kittisrikanwal

On that single day, Phaiboon squeezed the small-fly speculators by buying back US$3.088 billion to rebuild the reserves, heavily lost from the battle over the past week.

Phaiboon showed his unkind heart by handing the baht back to the speculators at penalty rate. He ended up engaging in buy-sell swap for US$1.37 billion, of which US$1.181 billion accounted for tomorrow/next (three days) transactions, US$90 million for eight-day transactions and US$100 million for one-month transactions.

It was not until May 18 that Rerngchai Marakanond, the Bank of Thailand governor, had time to read Phaiboon's report of his May 15 intervention. Rerngchai noted back that he had placed a long distance call to dr Amnuay Viravan, the finance minister, who was still in Fukuoka, Japan, to report him about the situation. Rerngchai said he also gave a similar briefing to Gen Chavalit Yongchaiyud, the prime minister, on the same day.

A permission from the top, he added, had been given for the Bank of Thailand to continue to intervene in the foreign exchange market to maintain the foreign exchange stability, in line with a decision of the Bank of Thailand’s management.

Turning on the propaganda

Amid the turmoil, the Bank of Thailand played up its propaganda machine. It reassured investors about the embattled baht, dismissing rumours that the baht would be devalued as the neighbouring central banks moved to contain the contagion effect by propping up their own currencies.

In its statement, released on that day, the Bank of Thailand said: "The central bank would like to ask the private sector to have confidence in government policy and not to listen to the rumours. The central bank wishes to stress that there would be no devaluation or changes in the currency exchange mechanism which were mentioned by rumours."

The Bank of Thailand admitted that the baht attack in this round in the offshore markets was very fierce but it quickly assured that it could ease the situation to a certain degree. With demand for the baht to close the short positions rising, banks came over to the Exchange Equalisation Fund's window, between May 15 and 16, to sell dollar by US$2.97 billion.

The squeeze appeared to work magic. Rerngchai further warned that the speculators must not mess around with the baht again because they would be punished in the most terrible way.

Amnuay cut his stay in Japan short and returned to Bangkok on that hectic Thursday of May 15, 1997. Amnuay had missed the opportunity to witness the bloody battle, although Rerngchai kept him informed over the phone throughout the episode.

Amnuay Viravan

Rerngchai sent Dr Bandid Nijathaworn, the director of the Bank of Thailand’s Banking Department, to greet the finance minister at the Don Muang International Airport. Bandid quickly briefed Amnuay about the overall situation, so that Amnuay could hold a news conference there and try to restore some confidence.

Amnuay readily danced the Bank of Thailand's tune. Holding a news conference, he warned that the Thai government was determined to guard the currency, adding that baht defence had been successful and would continue to be so. He also denied that he was going to quit, in spite of the growing political pressure against him.

Amnuay said Thailand has support "from all our friends", in its currency defence, adding that the Thai economy was "in a process of recovery".

The economy had gone through its worst and that he was pleased with a sharp decline in the current account deficit and improved inflation, as well as expectations that exports were improving.

In an orchestrated display of unity, Prime Minister Chavalit came out to support Amnuay in the evening, although there was pressure on him to fire the finance minister. He reaffirmed the government's staunch policy of defending the currency. He also said the economic conditions had also improved and that Amnuay would announce additional measures to bolster confidence in the economy and the financial system.

Chavalit got the impression that the Bank of Thailand won the hard-fought round of the currency battle after creation of the two-tier system. That afternoon he phoned Rerngchai and congratulated him and his team over the victory. The prime minister also promised to throw them a party to celebrate the victory.

There were rumours that champaign glasses were served inside the Bank of Thailand's headquarters as Rerngchai and his team celebrated a resounding victory. The speculators were taught a dear lesson. They would not come back again so easily. The currency peg would be here to stay.

However, Rerngchai and other Bank of Thailand officials later denied in their testimonies to the Nukul Commission that they opened champaign bottles to celebrate the victory.

Wearing A Poker Face 

Later that day Rerngchai tried to put a brave face on the crisis situation. Before May 8, 1997 the Bank of Thailand's net foreign exchange reserves stood at US$24.2 billion. But the seven-day war sent its net foreign exchange reserves to US$2.5 billion. The Bank of Thailand was completely broke.

Rerngchai Marakanond

But Rerngchai and his team had a wishful thinking that they could buy time for capital to flow back. He told The Nation News Agency that the central bank had brought the situation under control. The followings were excerpts of his interview:

When the baht came under firece attack yesterday (Wednesday), what kind of urgent measures has the Bank of Thailand used to defend it?

The baht volatility has been going on for several days. But we decided to fight the battle in the foreign exchange market so that we did not have to defend the baht at home. The pressure against the baht was very intense yesterday, a lingering effect from last week but this time the pressure was not due to economic problem. Nobody is referring to Thailand's current account deficit or fiscal position, but the speculators tried to use the excuse that there are diverse opinions within Thailand, a possible reshuffle of the cabinet's economic team. They also play on rumours, rumours that have been speculating since last week.

We have to keep a close watch on the situation. We assumed that they must tried to short-sell in the Thai stock market by creating further downward pressure on the market. Late last week they began to attack the baht in the London market, but we have been trying to contain the situation all along. I have reported fully to Deputy Prime Minister Amnuay Viravan and the prime minister has also been kept informed.

So the speculators have tried to take advantage of rumours to do with conflict within the economic management team. The rumours have had a big impact, so the speculators use them as an excuse. Let me explain it this way, the dollar is now weakening sharply against the Japanese yen, which will help the baht and help Thailand.

Secondly our economic shows signs of improvement in its stability. The current account deficit should not exceed six per cent of the gross domestic product, while exports have been improving. The March and April export figures should ensure that a recovery is underway in a more sustainable manner. Records of foreign exchange transactions at the Bank of Thailand increased by six per cent in March and eight per cent in April. If this increase continues for a third month it will assure us of sustainable exports.

Since the speculators have already taken their position against the baht, they have to decide whether they have to further build up their position or to buy further. Our economy will begin to improve with new measures to bolster confidence, the speculators understand the situation so they have to apply pressures on Thailand. Yesterday (Wednesday) was the fiercest attack, but we have prepared a strategy to deal with them. Sometimes we do not need to counterattack every move. In the battle within foreign exchange markets, we have to sometimes let them carry on, then we hit back so they lose money.

Has the situation reached breaking point?

As of last might we have brought the situation under control. Now the foreign exchange rates are moving within the trading band that we have tried to maintain, but we cannot become complacent. We've got to tackle our economic fundamentals, the fiscal positions of the government, the financial sector, the real estate sector, the securities industry and the liquidity crunch. Next week we'll begin to push our additional measures in a package to improve conditions. After the finance minister returns, we'll discuss it more.
 
There was a statement from the Bank of Thailand that it had sought cooperation from the Monetary Authority of Singapore to defend the baht. Is this the first time such regional cooperation has been extended?

This foreign exchange cooperation is part of the regional cooperation, with 11 of Asean member countries (excluding) Vietnam and Brunei, Australia, New Zealand, Hong Kong, South Korea, China and Japan. We have informed the speculators all along that this cooperation exists, but they say the cooperation is only on paper.
 
So in practice there is a foreign exchange policy cooperation?

Yes, there is. We have sought cooperation from the Monetary Authority of Singapore, which agreed to issue a joint statement of support. If necessary, we'll also ask for cooperation from other countries. You've got to understand that the speculators follow no ethical codes. In the stock market, we have the Securities and Exchange Commission to look after any stock manipulation to look after any stock manipulation, but in the foreign exchange markets there is no world police.

The central bank must have spent a huge amount of money defending the baht by intervening at different rates. I cannot say how much money we have spent, but we have our method of intervening. It's like betting.

Betting while you are also the dealer?

Yes, and sometimes we have to bluff them too. In the end the baht exchange rate fell to Bt25.88. At midnight we took a look at the baht on the London market, which also quoted in at Bt25.88.

What happens if the European of US foreign exchange markets open and start to trade the baht in a large volume again?

That's why we have to work day and night, we have to follow both the London and New York markets, as well as the Asian markets. This means that we have to work 24 hours a day, and we have been working very hard.

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