Amnuay was shocked

It was not until the third week of May 1997 that Rerngchai Marakanond, the Bank of Thailand governor, gave an in-depth briefing to Dr Amnuay Viravan, the finance minister, about the financial system and the currency crisis.

The twin problems had been haunting them throughout the first half of the year. The problems would continue to get worse.

After Amnuay had learnt about the huge swap contract obligations and the net foreign exchange reserves, he was shocked.

Amnuay Viravan

Intense discussions followed, albeit without any definite decisions. Amnuay later claimed that the only official report he received over the foreign exchange crisis was submitted to him on May 28, 1997.

Before that he had never been officially consulted over the matter at all.

As a technocrat, Amnuay had a good understanding of the bureaucratic practice. Any reports submitted to the finance minister, if they were to bear any official significance, must be documented in official writing. Verbal reports did not count.

Neither was he officially informed about how much money the Financial Institution Development Fund had printed to keep the financial institutions afloat, nor was he told about the foreign exchange reserves position after the baht intervention.

"Although by law I was the ultimate supervisor of the financial system, I was not informed at all about how much money the Financial Institution Development Fund spent that week or that month," he said in an interview at his Sukhumvit residence on March 4, 1998.

Then the public furore was flaring up after the Chuan government (1997-2001) admitted that the Financial Institution Development Fund, the lender of last resort, was expected to lose half of the Bt1.1 trillion in bail-out money it had spent to support the insolvent financial institutions.

During Amnuay's tenure, the Financial Institution Development Fund's total cost in bailing out the financial institutions reached only Bt200 billion. The cost expanded to a gigantic Bt1.1 trillion in the first quarter of 1998 largely because of the Chavalit government's failure to arrest the damages.

Much worse, it also moved to guarantee the private debts through a legislation in October 1997.

Amnuay clarified that every time he asked Rerngchai about the cost of the bail-out, he would be assured that the Financial Institutions Development Fund's short-term lending to the finance companies or banks were backed by collaterals.

"But later, I presume, the damages of the Financial Institution Development Fund could not be controlled following the introduction of an executive decree that allowed the Fund to lend money without collaterals," he said.

That was an important turning point.

At one point, after the May 1997 baht attack, Amnuay did ask Rerngchai about the Bank of Thailand's net foreign exchange reserves. He questioned why the reserves did not fall after the Bank of Thailand had defended the baht.

Rerngchai replied that the Bank of Thailand had managed to camouflage its net foreign exchange reserves by entering into the currency swaps.

Amnuay did not question further. He, too, did not quite understand the technicality of the currency swaps.

Neither did Rerngchai understand what was really going on around him.

Phaiboon went on a squeeze

During this time, Paiboon was still busy squeezing the foreign speculators. On June 16, 1997 he noted that he was frantically going after the foreign speculators by aggressively draining the liquidity in the offshore market.

Paiboon did a sell-buy swap for a total of US$1,977 million on that day alone. Of this, US$1,107 million represented a swap T/N (one day), US$720 million for S/N (one day) and US$150 million for seven day.

He noted that the Bank of Thailand intended to "drain liquidity in the offshore market aggressively to create pressure to the speculators during these several days when they need to settle their swap contracts this week."

After reading Phaiboon's June 16, 1997 report, Rerngchai approved it with a minor comment. "This is in line with the consultations of the management, which consisted of the deputy governor (Chaiyawat), assistant governor ( Siri), the director of the Banking Department on June 16th," he wrote.

On that day, Phaiboon also did a funding for the Siam Commercial Bank, Bank of Asia and Book Club Finance & Securities by doing buy-sell swap for a total of US$208.68 million. Of this US$150 million was for one month and US$58.68 million for three months.

It was not until June 18th, 1997 -- exactly one month and one week after Rerngchai received the Bandid Report -- that Chaiyawat wrote back.

On the right top of the last page of the Bandid Report, Chaiyawat noted back to Siri and Bandid:

"With regard to a pursuit of an appropriate foreign exchange policy in the future, please review the concepts and the options that have been reviewed periodically. When the opportunity arises, let the governor make a decision before proposing it officially to the finance minister (All in all, the finance minister has been constantly consulted)."

In effect, Chaiyawat did not say anything much. The status quo would continue.

Upon reading Chaiyawat's do-nothing stance, Siri again backed off.

On the following day, on June 19, 1997 Siri noted back to Bandid: "For your consideration and please proceed ahead."

The defence must proceed

The green light was switched on. The basket of currencies system would be protected at all costs.

In his testimony to the Nukul Commission, on February 4, 1998 Rerngchai insisted that before that date of June 18, 1997 he had never received any formal recommendation from Chaiyawat or his top aides on adoption of a new foreign exchange regime at all.

The May baht attack was unexpected and that the central bank was totally unprepared to cope with the situation. The reason: the central bank did not have any other foreign exchange policy options on hand.

By the time Chaiyawat sent back the report, the central bank's foreign exchange reserves position was almost depleted.

Shortly after that Chaiyawat somehow began to change his die-hard conviction that the currency peg would not hold on. But by that time everything was too late.

Later on Amnuay would contradict Rerngchai's statement that the governor had kept Amnuay fully abreast of the problems in the finance sector and with the attack on the baht in the turbulent first half of 1997.

 ''You can check the evidence,” he said. ''As for the criticism as to why I did not put a brake on the Financial Institution Development Fund's activity, I could say that I had been assured that any lending were backed up by twice the amount in collateral.

''Any lendings by the Fund without collateral would certainly lie beyond my knowledge.''

He said that every time he asked Rerngchai about the problems of the finance firms, the former governor assured him that things were under control.

Rerngchai’ story was that he had kept Amnuay fully informed and consulted him and his central bank colleagues on every step in the supervision of the financial institutions and in the defence of the baht.

If there had been any attempts to stop the Fund's activity or to revise the disastrous baht defence policy, he would have readily concurred, Rerngchai said.

After leaving office, Amnuay and Rerngchai both came out to defend their role in the run-up to the financial crisis, which eventually wreaked havoc with the economy.

The Chuan administration deliberated the Fund's Bt1.1 trillion bailout of the failed financial system and the possible loss of half of this amount -- which would have to be compensated for with taxpayers' money.

It would also subsequently settle the score with the central bank over its squandering of US$30 billion in foreign exchange reserves, which effectively turned Thailand into a bankrupt nation.

When Amnuay left office on June 18, the Fund had spent almost Bt200 billion to support the finance companies. Six months later the amount had jumped more than fivefold to Bt1.1 trillion.

On the baht defence, Amnuay again denied having any intimate knowledge of the central bank's foreign exchange operation. Despite ongoing consultations, Amnuay said he had never been briefed on the sensitive figures of the central bank's foreign exchange reserves, which should have been significantly depleted by selling dollars to defend the baht.

Thailand's foreign exchange reserves of US$34 billion to $35 billion in did not fall significantly because the central bank cooked its books to make it appear that it still had its hands on the reserves, although the reserves had been spent in the forward market to defend the baht.

The central bank fiercely defended the baht because it feared that Thai corporates, which were saddled with $70 billion in foreign debts, would have been plunged into bankruptcies had the baht been devalued.

It was not until May 28, 1997, that Rerngchai submitted to Amnuay an official report indicating that between May 10 and 15 the bank had piled up $17 billion in foreign exchange swap contracts. It sent out an alarm note that it would have no choice but to devalue the baht.

But the baht float, or a de facto devaluation, would have to be delayed until July 2 to help Thai corporates complete their financial books in the first half without too much problems.

After Thailand sought a US$17.2 billion bailout package from the International Monetary Fund in August 1997, it was forced to disclose the swap positions, which turned out to be a shocking $23.4 billion in outstanding.

Before that, however, the central bank had already wasted $7 billion in the defence, bringing the total cost of the baht defence to a staggering $30 billion.

There were two versions of the report that Amnuay received on May 28. One simply outlined the scope of the foreign exchange management, without going into the details for fear that it would be leaked and cause further damage to Thailand's baht policy.

The other went on to detail the highly confidential foreign reserves position. Amnuay received the first version and any details left out were followed up by Rerngchai in his verbal report.

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