Thailand currency crash 1997

It was Prime Minister Chavalit Yongchaiyudh & his government who allowed Banks to lend without criteria & finance companies to go over board. The government of Thailand abandoned its efforts to maintain a fixed exchange rate for the baht & left itself wide open for currency speculation. The writing was on the walls & the Bank Governor didn't know what to do --- typical noone could make a decision. The currency quickly depreciated over 20 % the Central Bank had little answers & slow to move. What forced Thailand to devalue its currency was massive speculation against the baht, speculation that over a few months had consumed most of what initially was a large stockpile of foreign exchange. And why were speculators betting against Thailand? Because they expected the baht to be devalued, what else.

The Chavalit Yongchaiyudh government committed Thailand now to be bailed out by the IMF without parliamentary approval or public scrutiny. The fashion by which it accepted the tough conditions prescribed by the IMF was also treated with secrecy. But, unlike people in other countries, the Thai public at that time supported the IMF programme at the expense of sovereignty because they realised that the country had come to a dead end and only external help could pull the country out of the crisis. Still, nobody outside the top policy-making and central banking circle realised that Thailand was insolvent because the central bank had already lost all its foreign exchange reserves in the disastrous baht defence. The Thai public had little understanding on the far-reaching consequences of the IMF programme, which sought to shake up the entire financial, economic and legal system in one stroke.

WHY THE CRASH HAPPENED

But what caused the crash? The Thailand government led by Chavalit blamed George Soros the man who made billions for his own investment fund by foreseeing both the devaluation of the British pound in 1992 and, six months before it happened, the 1997 crash in Thailand. But while George Soros may have led the way in & certainly predicted 6 months earlier that Thailand faced a crash, the real push came from other speculators; institutional investors such as mutual and insurance funds, financial and non-financial corporations so its not fair to blame George Soros who exploited a hole in a bad financial Central Bank institution at the time. The Central Bank did not heed on advise as then those who make changes are fully responsible in Thailand -- - something noone wishes to know about esepcially those who make the changes. Some of these speculators were Southeast Asians including Thaksin Sinawatra and Chavalit himself, we have beed told who speculated on stocks from inside trading?---as yet not proved?? but that's not surprising. For once there is a profit to be made, despite fervent calls for patriotism, few speculators thought twice in partaking in the run on their own country's currency. Even ATMs in Thailand were milked until the Banks work up but it was bad for Exporters and Thailand Traders whose money was kept up to 1-2 months by Banks hoping for a hike in rates. In this country, we have seen Thais reaping enormous profits from the attacks on the baht so as you see who is to blame really - - - its time Thailand learnt a lesson but will they as the same things are happening yet again & the compounding factor will be OIL.

When Southeast Asia jumped on the global bandwagon, it should have prepared for the downs as well as the ups. Instead, Thailand allowed the region's spectacular economic growth to lull them into a false sense of invincibility and security. By pegging its currencies, Southeast Asian economies have ensured a certain degree of stability to help lure foreign funds. But such easy money is too often splurged on non-productive property markets and wasteful mega-projects which is just what is happening today in Thailand. To add to the woes, billions of $$$$ are squandered through unmitigated corruption & still remains today in Thailand. Such excesses are now being punished by the currency market.

Bank Negara, Malaysia's central bank, often dabbled in currency speculation as Mahathir blamed Soros but it was happening in his own back yard. A few years ago, Negara had its hand badly burnt when it was caught short while speculating on the US dollar, resulting in losses running into billions. Asian countries were doomed to crash due to a misalignment of their currencies.

Through a pegged "dollar " policy, Asian banks and corporations heavily borrowed US dollars in the short-term and converted, without hedging, the dollar into local currencies for long-term investments. This appeared to carry no risk due to the implicit foreign-exchange guarantee. The heavy foreign borrowing led to a credit boom, with the money going into unproductive use, mostly real estate speculation, unproductive loans & Banks lending subprime to friends with little or zero collateral. Then Japan's slowdown worsened, the US dollar appreciated and the balance of trade of the Asian economies deteriorated.

Soros said it was clear that the trade accounts and the capital accounts of the Asian countries were becoming untenable, hence the attack on their currencies. He argued that hedge funds did not trigger the crisis, although they played a role. "If a trend is unsustainable, it is surely better if it is reversed sooner rather than later," he writes. "For instance, by selling the Thai baht short in January 1997, the Quantum Funds managed by his investment company sent a market signal that the baht may be overvalued. Had the authorities responded to the depletion of their reserves, the adjustment would have occurred sooner and been less painful. But the authorities allowed their reserves to run down; the break, when it came, was catastrophic."

On July 2ndwas the central bank of Thailand gave up trying to support its currency, and the baht collapsed. In just a few months the Thai Bank had spent $US60 billion, $US23 billion of it borrowed. But why? Over the previous few years, half of corporate Thailand had taken to gambling on its currency. Seeing that the interest rate on baht was higher than the interest rate on dollars, Thai companies borrowed as loads, exchanged them for baht, gained from the interest, and hoped that the baht would not collapse.They were wrong. By the end of last summer just about every large company in Thailand was bankrupt.

But that was the start. A vicious circle emerged: when investors saw that corporate Thailand was bankrupt, they sold their Thai shares, and the stock market crashed. When the stock market crashed, more money fled Thailand and the baht fell further. The Thai people responded by getting rid of one Government -- the New Aspiration Party run by Chavalit-- and bringing in the Democrats. The job of straightening the books now became a nightmare.