Working on the Squeeze

THE following day, on Friday, May 16, 1997 the Bank of Thailand tightened up additional capital controls to further squeeze the hedge funds and the currency speculators.

Apart from barring the local banks from lending baht to the offshore banks, it restricted the local banks from conducting foreign exchange swap (baht for US dollar) with the offshore parties. It also prohibited the local banks from selling baht for US dollars in the spot market to speculators in the offshore markets.

The capital controls further cast their magical effects. On that day the baht, which was pegged at Bt25.82, bounced to a 14-month high against the US dollar as it appeared that the Bank of Thailand was heading toward another hard-won battle.

The US dollar dipped to a low of Bt25.30 in early Singapore trading, compared to Thursday’s close of Bt25.50. In the European market, the baht strengthened further to Bt25.20.

Pressures on the baht almost returned to normal. The US dollar/baht trading in the morning session moved in the range of Bt25.70 and Bt25.80. At one point, it even went below the lower end of the central bank’s mid-rate of Bt25.82. The offshore baht/US dollar exchange rate subsequently strengthened to Bt25.10-Bt25.20, compared to the onshore transactions of Bt25.81.

The tomorrow/next rate rose to the equivalent to 1,431 per cent a year early that day, dealing a heavy blow to the speculators. Speculators who could not jump out of the market in time ended up losing several hundred million dollars.

Reports of a concerted intervention prompted Koh Beng Seng, the deputy managing director of the Monetary Authority of Singapore to come out with a confirmation. He said: "The important think is that the joint intervention was effective."

Koh Beng Seng

Mr. Koh would spent over 24 years at the Monetary Authority of Singapore where he made significant contributions to the development and supervision of the Singapore financial sector in his capacity as Deputy Managing Director, Banking & Financial Institutions Group.

Koh, who got the assurance from the Thai authorities that the baht would not be devalued, would certainly not disclose how much money the Monetary Authority of Singapore had lost from its baht holdings after the baht was devalued in July.

The two-tier system initially appeared to be in favour to the Thai financial sector, vulnerable to the high interest rates traditionally imposed to defend the exchange rate. The two-tier system, to a certain extend, succeeded in shielding the domestic sector from the interest rate increases, while punishing the speculators in the onshore market.

On that day Dr Chaiyawat Wibulsawasdi, the deputy governor of the Bank of Thailand, was quick to trumpet the Bank of Thailand’s victory in the bruising battle. He emerged to announce that the current round of the baht battle had ended, with the foreign speculators paying a dear price for their speculative attacks.

Chaiyawat Wibulsawasdi

He along with other central bank officials were confident that they had wiped out the foreign speculators in that fierce battle. The speculators, he said, had to buy the baht from the more expensive swap market to square their positions.

“They must pay the price,” he declared.

Chaiyawat also emphasised that now that the baht situation had improved, there would not be any need to devalue the baht or to broaden the baht’s trading band. He believed that the Bank of Thailand was the largest baht supplier and that the baht was not internationalised as the US dollar or the yen so it should be in control of the situation.

Overall between May 9 and 16, 1997 the Bank of Thailand fired US$20.51 billion from its reserves to defend the baht, bringing its outstanding foreign exchange swap contracts to US$25.463 billion. (Bandid Nijthaworn, Mamorandum 379/1997, “The Foreign Exchange Market Situation and the Bank of Thailand’s Operation,” the Banking Department, the Bank of Thailand, May 22, 1997, Page 5.)

This swap contracts did not include those that would mature in toward the end of that month, which would bring the total swap contracts to about US$30 billion.

As of the end of April 1997, the outstanding swap contracts stood at only US$13.69 billion.

The Bank of Thailand had just depleted almost all of its ammunitions for future battles.

The Paper Tiger

 A few days after the mid-May battle, Chaiyawat asked Rerngchai Marakanond, the Bank of Thailand governor, for a permission to host the Deputies' Meeting of East Asia and Pacific (EMEAP) Central Banks.

EMEAP is a powerful club, whose members consist of the Reserve Bank of Australia, People's Bank of China, Hong Kong Monetary Authority, Bank Indonesia, Bank of Japan, Bank of Korea, Bank Negara Malaysia, Monetary Authority of Singapore and Bank of Thailand.

Already the Bank of Thailand had signed bilateral currency-operation agreements with the Monetary Authority of Hong Kong, the Reserve Bank of Australia, the Monetary Authority of Singapore, Bank Negara Malaysia and the central bank of the Philippines.

Chaiyawat told Rerngchai that he would like to use the occasion to thank the members for their advice and their coming to Thailand's rescue during the May currency crisis. After all, the Hong Kong Monetary Authority and the Monetary Authority of Singapore had intervened to help prop up the Thai currency by spending US$500 million each from their pockets.

Rerngchai had no objection because after all it was a good idea to consult and share opinions on the currency turmoil with the friends during the bad time. So the meeting was quickly arranged a week later over the weekend between May 23 and 24.

On Thursday May 15, Dr Amnuay Viravan, the finance minister, already lauded the concerted regional central bank intervention to prop up the baht as a “new era’ of cooperation among the Southeast Asian central banks, known as a group as Southeast Asian Central Banks (SEACEN).

This was a different body from the EMEAP, consisting of Thailand, Malaysia, Indonesia, the Philippines, Singapore, South Korea, Taiwan, Sri Lanka, Nepal and Burma. Amnuay suggested then than all the SEACEN members had come to Thailand’s rescue because “no country can see the currency crisis as an individual problem.”

He added: “It’s not as if you can let one country suffer and others will survive. We will all get hurt.”

The participants of the EMEAP meeting included Dr Stephen Grenville, deputy governor of the Reserve Bank of Australia; Mr Chen Yuan, executive deputy governor, Li Fuxiang, deputy director-general, State Administration of Exchange Control, and Yu Yi, deputy division chief, International Department of the People's Bank of China; Mr Andrew Sheng, deputy chief executive, Chu Siu-chuen, division head, Monetary Operations, and Ms Julia Leung, head, External Relations Division, of the Hong Kong Monetary Authority; Mr Bambang Trianto, director of Foreign Exchange Department, and Mr Nirwansyah, deputy manager/senior manager, dealing rom of Bank Indonesia; Takashi Anzai, executive director and Teruyuki Kai, manager, International Department of Bank of Japan; Hoon Shim, assistant governor of Bank of Korea, Ms Latifah Merican Cheong, head, Economics Department, and Mr Mainor Awang, senior Manager, Banking Department of Bank Negara Malaysia; Ms Yeo Lian Sim, director, International Department of Monetary Authority of Singapore. Representing of the Bank of Thailand were Chaiyawat, Siri, Bandid, Dr Kleo-Thong Hetrakul, director Economic Research Department; Ms Nitaya Pibulratanagit, deputy director, Economic Research Department; Phaiboon Kittisrikangwan, division chief, Banking Department, Nawaporn Maharagkaga, chief of Basic Research Section, Economic Research Department; and Ms Alisara Smerasuta, chief analyst, Analysis Section, Banking Department.

The EMEAP's ambition was to set up a central bank of the region in the style of the Bank for International Settlements. The United States had been quite suspicious with the emergence of this grouping. It would like to have an influence in EMEAP, fearing that if these members could bring their act together they could become a formidable player in the global financial markets.

The US’s aim was to achieve trade and financial liberalisation in Asia in general and to acquire additional sub-branch status for American banks in Thailand in particular. It had been lobbying to join this grouping and was eventually granted an observer status.

On that day, Chaiyawat chaired the EMEAP meeting of the deputy governors. He expressed his regret that the baht crisis had a repurcussion on the regional markets. He went on to say the ad hoc meeting as an informal venue for policy discussion concerning the recent market turmoil in the regional financial markets.

In particular, the Thai experience on May 14 could serve as a case background on speculators' behaviour and tactics. Chaiyawat also would like to get more surveillance cooperation from the other members.

In addition, he added, the Bank of Thailand hoped to obtain valuable comments from the other EMEAP members, particularly on the role of hedge funds in the currency market, on the identification of main players involved, and on the possible cooperative efforts for market stabilisation.

Chaiyawat noted that the main features of the recent speculative attack on the Thai baht were as follows: First, the attack came from offshore players in offshore markets.

Second, unlike other occasions, the Bank of Thailand separated the onshore and offshore markets and used the interest rate as the tool to stem offshore speculation. The separation of markets was similar to the measure employed by Bank Negara Malaysia in 1994 and the measure continued to be employed by the Monetary Authority of Singapore.

Third, the big-time currency players took on medium-term positions. So he said the authorities had to monitor the situation carefully.

Fourth, the attack came at the time when the economic fundamentals, most importantly the current account, were already improving.

Then it was the turn of Bandid to speak. He delivered a detailed address that provided details of the speculative attack on the baht. He told his EMEAP audience that the speculative attack had been a recurring event this year, with the first round of attack occuring at the end of January and continuing on in February before the pressure temporarily subsided.

The attack resumed on May 8. Bandid said the hedge funds' determination to attack the baht was based on the rationale that that the baht was overvalued, which was reinforced by newspaper articles, at a time when the US dollar was gaining strength.

Second, he said, the grounds for attacking the baht lay in a belief in the policy mix between demand deflation and a pegged exchange rate was not sustainable. For it would eventually accelerate the pain from exports and economic slowdown, hence leading to a temptation to adjust the exchange rate policy.

He also noted that about the very large total position of hedge funds, much larger than two or three years ago.

Hedge funds which were identified by the Asian Wall Street Journal and the Wall Street Journal on Thursday May 22, as being involved with the speculative attack included the Soros Funds' Druckenmiller and Rodney Jones; Tiger Funds' Julian Robertson, Bruce Kovner, and Lee cooperman; as well as operations at dealers such as Goldman Sachs, JP Morgan, Citibank, BZW and from his own sources, Morgan Stanley.

Bandid outlined the speculative attack as follows: First, there as a debate over the exchange rate and economic policy in the local press. This aimed in particular at swaying the public opinion into believing that the Government had limited choices.

At the same time, there were research articles by US investment banks -- Goldman Sachs in particular for the case of Thailand -- which lent signals that a devaluation was imminent in a few months.

Then there followed rumours on the timing of the change in the exchange rate policy. As for the speculative attack on the Thai baht this May, the rumours on the widening of the exchange rate band began on Tuesday. The actual attack followed on Friday.

What should a central bank do under this circumstance? Bandid said there are three ways to do so. First Intervening in the foreign exchnage market, second hiking up the interest rates to raise the cost of the attack, and restrict capital flows.

In the previous rounds of attack, the Bank of Thailand used only the first two instruments. As for the attack in May, however, the third instrument was employed for the first time. The Bank of Thailand established a two-tier foreign exchange market by requesting that commercial banks refrain from lending baht to the offshore parties.

The Bank of Thailand's counteractions to the speculative attack since May 7th could be chronicled as follows: With the emergence of rumours on the widening of the currency band in London on Tuesday 6th, the Bank of Thailand denied the rumours through dealers' screen. The attack began nonetheless, first in London and then carried over to New York.

The Bank of Thailand thus intervened in the FX market on Friday morning and, and the same time issued a strong statement reconfirming no change in the exchange rate policy. While the market calmed down, the exchange rate continued to move above the band.

The prime minister came out to announce no change in the exchange rate policy. The announcement resulted in a much calmer market on Monday 12th. As the momentum of the speculative attack re-emerged on Tuesday 13th, and the attack from the hedge funds was particularly strong on Wednesday 14th, the BOT asked the EMEAP colleagues for help on Tuesday and Wednesday.

The cooperation from EMEAP members was successful in halting the attack in the regional market. The attack still continued in London and New York in the late afternoon of Wednesday.

The Bank of Thailand thus squeezed the speculators by cutting off the baht supply to the offshore market, effectively raising the offshore interest rate to 1,000 per cent on Thursday 15th. As the hedge funds and US banks were cornered, the market calmed down significantly, with the onshore exchange rate moving back to stay within the band.

Bandid quoted an article in the Wall Street Journal, which suggested that the speculators lost about US$300 million.

Bandid concluded his remark by trying to draw a lesson. The US hedge funds were very determined and had a large resource pool. Their attack followed a pattern, the most obvious being the build-up of press campaign to sway public opinion. Cooperation from commercial banks made it easier for the hedge funds to mobilise resources. There were noticeable implications of the recent speculative attack on the regional markets. In particular, there was also pressure on other regional currencies when the Thai baht was being strongly attack.

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