Polite opinions…and no action

IT is Thailand's bureaucratic practice to pass internal documents around in a hierarchical order. An official, after reading a piece of document, normally signs his name and the date as a record of his acknowledgement, which mostly but no necessarily accompanies with an opinion. The official would then pass on the document to his or her immediate boss. The document may end up with in the hands of five or six individuals involved.

If any official has an opinion or a reservation, he or she is free to express it, as a record, on the final page of the document. Since Dr Siri Garnjarondee, the assistant governor of the Bank of Thailand, was the boss of Dr Bandid Nijathaworn, the Bank of Thailand’ s director of the Banking Department, he was the first to read Bandid’s report.

Siri acknowledged subsequently that it was he who ordered Bandid to prepare the report so that he could use it as a pretext to put a hold on the costly baht defence.

Dr Siri Garnjarondee

There had been disagreements among the top Bank of Thailand officials over the baht defence policy since the International Monetary Fund’s mission came over to Thailand in March 1997 to review the fragile financial and economic conditions.

Then David Robinson, an IMF staff, came over to Siri’s room to recommend a change to the foreign exchange regime and to discuss the real effective exchange rate with him. Robinson warned Siri that Thailand would pay a dear price if it failed to adjust its foreign exchange regime.

After that episode Siri had his doubts about the fixed exchange rate system. He had been quietly airing his dissent view against Dr Chaiyawat Wibulsawasdi, who had been in charge over the Economics Research Department.

At one point, Siri questioned: “Are we defending the thing that can’t be defended?”

He also warned that any baht defence should not reach the point that resulted in a depletion of the country’s foreign exchange reserves. Siri viewed that the central bank should avoid the situation under which it would be forced to devalue the currency or to float the currency when the reserves completely ran out. For that would bring about a catastrophe.

But since Chaiyawat, who had the ears of and the respect from the Rerngchai Marakanond, the Bank of Thailand governor, insisted that the exchange rate regime was appropriate and the baht was not significantly overvalued, Siri could not do anything further.

Siri believed that the currency peg system could not hold on.

There was still a conflict of opinions among the top Bank of Thailand officials. Chaiyawat, Dr Bandid Nijathaworn, the director of the Bank of Thailand’s Banking Department, and Paiboon Kittisrikangwal, the treasury chief of the central bank, were deemed hawkish in the baht defence. They had faith in the currency peg and were afraid that any radical departure from this foreign exchange system would complicate the macroeconomic management.

After reading the report on that same day of May 12, 1997 Siri immediately passed it on to Rerngchai. Siri had some deep reservations to express.

"For your information about the situation and the outcome of the intervention in the foreign exchange market and the remark of the director of the Banking Department about the policy of intervention in the future. I think that the central bank must assess very "seriously the past intervention policy to see whether it will be successful under the present economic and financial conditions. This is to minimise the losses that might happen," Siri wrote.

 Siri underlined the phrases "must evaluate very seriously" and "will be successful" to reflect his polite protest against the continuing baht defence as the foreign exchange reserves were fast falling.

His formal language was mild. But in private, Siri had been warning the governor about the sharp dwindling of the net reserves. "Before you go to bed, please plot the graph of the net reserves on the wall of your bed as a reminder," he once told Rerngchai.

Siri had also sent him personal notes expressing his dissent with the seemingly unlimited intervention policy. But Rerngchai did not seem to pay enough attention because he was inclined to go along with Chaiyawat's view. After all, Chaiyawat had never given any signal to him to adjust the foreign exchange regime.

Upon reading the Bandid report on that day of May 12, 1997, Rerngchai immediately passed it further to Chaiyawat on that same day.

On that same final page, at the bottom-right corner, the governor formally addressed: "To Deputy Governor Chaiyawat: For your information since it involves the EEF (Exchange Equalisation Fund). Please work on a memo for presentation to the finance minister as chairman of the EEF, so that we may proceed on a review of the policy."

Rerngchai's tone did not carry any sense of urgency. For unclear reasons nonetheless, Chaiyawat sat on that confidential report without giving any immediate feedback for more than a month.

Chaiyawat would testify to the Nukul Commission later that it was not until May 9 that he was informed about the baht attack. He was not sure when he learnt about the first attack. And it was not until May 13-14 that he was summoned to attend a brainstorming session at which point it was too late to salvage the situation.

Chaiyawat had been trying to give the impression that he was not part of the foreign exchange management team because he was not delegated to any key positions.

Besides, at that point, he still held firm his conviction that any adjustment to the currency regime at a time when the country was facing the financial institution crisis would be disastrous.

Chaiyawat was also a firm believer in the strong economic fundamentals of Thailand. For that reason he believed that the baht attack was only temporary. Soon the speculators would go away. He approved the liquidity management by doing the swap because he believed that sooner or later the cycle of economic downturn would correct it way. Then confidence would return.

He shared the same view with Vijit Supinit, the former governor with which he had worked closer, that the current account deficit would work its way to become a current account surplus as the economy built up its export base. He believed in the basket of currencies, which he had played a key role in its creation. And he did not believe in any other pricing of the baht.

Chaiyawat also believed that the East Asia and Pacific Central Banks would come to Thailand’s help, if worse came to worst. In August he also tried to mobilise the central banks of Hong Kong, Singapore, Malaysia, and Indonesia to come to the Bank of Thailand’s rescue.

As it turned out, all of them were reluctant to extend their assistance since they had their own reserves to protect. And if they were to lend out their reserves to Thailand, the Bank of Thailand would still need to pledge the US treasuries as bond with them in the repurchase agreements.

All The Shots Were Fired

Ten days later, on May 22, 1997 Bandid wrote Siri another seven-page memo. It was a follow-up to the May 12, 1997 report he earlier wrote. This time Bandid really felt the heat of the looming crisis.

In this memo, Bandid provided snap shots of the foreign exchange crisis, outlining the scale of the baht attack between May 8th and 16th and the central bank's costly intervention.

In sum, between May 9th and 16th, the central bank's intervention in the foreign exchange market totalled a staggering US$20.51 billion. The net foreign exchange swap contracts, piled up to sterilise the currency attack and to temporarily rebuild reserves, hit US$25.463 billion -- a big jump from April's US$13.69 billion.

Without the swap contracts, the reserves would have fallen immediately by US$4.9 billion to US$32.4 billion.

Somehow Bandid did not provide Siri with the critical information on the net foreign exchange reserves position.

Bandid's purpose in writing this memo was to lay out a game plan on how the central bank should proceed. He admitted that the central bank's intervention in the foreign exchange market with a dual objective of stabilising the Thai currency and defending the integrity of the currency peg system could only buy time while the economic fundamentals had failed to recover.

Since the intervention led to a run-down of the central bank's reserves, Bandid recommended that the BOT took a harsher stance against the speculators lying in wait in the offshore markets.

The commercial banks, he indicated, should be asked to continue to cooperate by squeezing the baht in the offshore markets. This would deny the foreign speculators from having access to the baht to unwind their positions.

In the meantime, Bandid proposed seven steps that the central bank should do further to contain the crisis.

First, the central bank should also hold another meeting with the local commercial banks and urged them to provide additional cooperation to prevent the baht speculation, which he said could happen again. On May 20, 1997 the central bank issued a similar request to the local commercial banks.

Second, the BOT should open up the foreign exchange swap market in the country so that the local banks could adjust their short-term liquidity.

Third, the BOT should strike an agreement with other central banks in the region -- apart from the Monetary Authority of Singapore, Hong Kong Monetary Authority, Bank Negara of Malaysia, Bank Indonesia and the Reserve Bank of Australia -- to intervene in their foreign exchange markets and shore up the baht on Thailand's behalf.

In this endeavour, the Bank of Japan and the central bank of the Phillipines should also be approached. After all, these central banks formed the East Asia and Pacific (EMEAP) Central banks, of which the Bank of Thailand was a member.

Fourth, a protest note should be sent to US Treasury Secretary Robert Rubin and Federal Reserve Board Chairman, Alan Greenspan. The idea was to point out the malicious behaviour of some US financial institutions and hedge funds, which were the cause of the Thai turmoil.

Fifth, Bandid recommended that a regional currency fund be set up to help stabilise the foreign currencies in the EMEAP. The fund would be tapped by a member country in time of liquidity crisis.

This proposal was a foreshadow to the US$100 billion Asian regional fund, which was highlighted during talks at the corridor at the World Bank/IMF annual meeting in Hong Kong in October 1997. The Asian regional fund, however, was strongly opposed by the United States and the IMF, fearing that it would give rise to a rival institution to the IMF. The IMF argued that its role as a global monetary cop was adequate, and that what was needed was surveillance -- not another supranational organisation.

Bandid also suggested that this proposal should be raised at a meeting on May 24-25, 1997 in Bangkok, where the EMEAP members could exchange opinions and sign an agreement to show the spirit of regional cooperation. The EMEAP meeting did take place, but it failed to sign any cooperative agreement.

Sixth, Bandid suggested that the Bank of Thailand prepared to borrow fresh funding from different sources such as opening a credit line and swap line from the Federal Reserve Bank, the Bank of Japan and the Bank for International Settlements. Or the central bank could seek a stand-by credit from the foreign commercial banks.

Bandid was optimistic that the measures to improve the economic fundamentals would be working. Exports would pick up and the current account deficit would get in a better shape, and the government would commit to fiscal discipline as evidenced by the 1997-98 balanced budget.

But, he said, it was still necessary to keep interest rates high for some more time to defend the baht. He was particularly concerned with the slow pace at which the authorities were trying to tackle the real estate slump and the financial sector distress.

"This was the only issue and the last issue that had not been seriously undertaken. It is also a weak spot in the government's policy," he noted.

Bandid ended his memo by noting that the finance minister should receive a copy of another report of his, written on May 12, 1997 right in the middle of the currency battle. But he expressed his concern over a possible leak of the confidential report, which provided the top-secret monthly foreign exchange reserve positions of the central bank since the end of 1996.

If the report were to be leaked to the markets, it would spell doom for the cause of the central bank's baht defence because the speculators would have known the central bank’s reserves run-down.

So in the final page of his neatly typed memo, Bandid wrote as an appendix, in his own handwriting. He suggested that the finance minister should be informed about the actual situation and about the confidential foreign exchange reserves. He would work out two copies, the original one carrying the sensitive reserve figures and the other copy deleting the figures.

If the central bank decided to submit the version without the reserve figures, Rerngchai could verbally report the figures to Dr Amnuay Viravan, the finance minister.

Bandid explained: "The present circumstance is very grave due to a dwindling of the foreign exchange reserves in the last defence. The Banking Department drafted two reports to inform the finance minister. The first report would cover the reserves that had been lost from the defence.

“Another version would simply sum up the situation for acknowledgement since the finance minister should be quickly informed. But since there is a risk of a leak, which will damage the stabilisation policy and the operation of the central bank, I suggest that we send a copy of the report that does not provide the foreign exchange reserves. But the finance minister will be verbally informed about the reserves position. This depends on the central bank's judgement."

This clearly suggests that Dr Amnuay Viravan, the finance minister, had been kept in the dark all along about the sharp run-down of the foreign reserves.

Bandid also re-emphaised a need to mobilise foreign funding in the form of credit facilities to prepare for any damages that could incur from another round of the baht attack. He viewed it as highly possible that the speculators would come back to attack the baht over the next one to two months.

Siri read the memo, but it was not until four days later, on May 26th, that he passed it on to Rerngchai.

On that same final page of the memo, Siri wrote: "For your information about the situation in the foreign exchange market since May and about the policy measures we have implemented so far. And we would like to seek your opinion on the direction to proceed ahead."

Siri would go along with Bandid’s recommendation. He told Rerngchai that there would be two versions of the report. The first version would give the details of the figures of the Bank of Thailand's intervention and its net reserves positions. The second version would not give the figures.

This depended on Rerngchai to make his own judgdment as to which report should be submitted to Amnuay.

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