Charm Needed To Sway The Central Bank On Debt Burden: Thai Opinion

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OVERDRIVE

Charm needed to sway the central bank on debt burden

Thanong Khanthong

Now we know why the Yingluck government has brought in Dr Virabongsa Ramangkura.

The former finance minister is heading a committee to rehabilitate Thai industry and infrastructure in the aftermath of the worst floods in 50 years. To reconstruct the economy, the government needs money. But, due to all the populist spending pledges, it is broke. Virabongsa's task is to help the government find the money - at least Bt350 billion for the time being.

The easy target is the Bank of Thailand, to which the government could pass on the burden of an old debt so that it can create a new debt for fresh spending.

The government needs a personality of Virabongsa's stature to battle against the central bank, whose governor, Dr Prasarn Trairatvorakul, is drawing up a strong defensive line. The battle now looks ugly, centring on the debt of the Financial Institution Development Fund (FIDF), an arm of the central bank.

The ghost of the FIDF will not be laid to rest easily. Every time a new government steps in, it wants to find a way not to service the debt of the FIDF, which used taxpayers' money to bail out the financial institutions in the 1997 Asian financial crisis to the tune of Bt1.4 trillion. The FIDF debt now stands at about Bt1.1 trillion.

The Yingluck government does not want to service the annual interest payment of Bt45 billion for the FIDF. It wants the central bank to assume all the Bt1.1 trillion of FIDF debt so that it has room to create new debt.

Thailand's public debt has exceeded Bt4 trillion, equivalent to 40 per cent of the gross domestic product. If the FIDF debt of Bt1.1 trillion is deducted from the overall public debt, the governmentwould be in a position to create new debt for massive spending. The government, prior to the floods, leaked a "New Thailand Project", through which it plans to invest Bt900 billion in the economy.

The Pheu Thai politicians live up to their repurtation as big-time spenders.

If my memory is correct, Dr Virabongsa used to oppose any attempt to pass the FIDF debt to the central bank, arguing that doing so would compromise the financial and monetary discipline of the country. He appears to have gone through a change of heart. He would like the central bank to dig into its foreign exchange reserves of more than US$180 billion to pay off the FIDF debt.

Governor Prasarn is protecting the central bank's turf. The FIDF debt was incurred by the previous government (led by General Chavalit Yongchaiyudh), which offered a 100 per cent blanket guarantee of the public deposits and creditors while the banks and finance companies were failing. No government in the world has hitherto issued a Cabinet resolution to protect creditors' rights like the Thai government, which did so under the directive of the International Monetary Fund.

Since it is the policy of the government to protect the public deposits and the foreign creditors' money, it must keep its promise. In this regard, Prasarn is correct to have insisted that the government continue to pay the debt of the FIDF.

The BOT's foreign exchange reserves are not totally secure. Foreign investors could withdraw their money out of the country any time in the event of financial shocks. If they were to flee the country (by converting the baht for the dollar before taking the money out) like they did in 1997, Thailand could lose its reserves in a hurry.

The position of Thirachai Phuvanat-naranubala, the finance minister, on the FIDF debt is not clear. Initially he wants the BOT to study a plan to help the government reduce the debt of the FIDF. He realises that the central bank is losing money from its monetary operations, resulting in a negative net worth of more than Bt400 billion. He wants the BOT to share the burden, but he opposes an outright monetisation of the FIDF debt, which would destroy the credibility of the central bank. By the way, Thirachai used to serve as BOT deputy governor.

If the BOT were to totally monetise the Bt1.1 trillion FIDF debt, it would increase its negative net worth to Bt1.5 trillion. In this case, confidence in the baht would wobble. That is the road Zimbabwe has taken.

Today, Kittiratt Na Ranong, the deputy prime minister, will call a meeting to set a plan for the Finance Ministry and the BOT to work out the FIDF debt. The details remain shrouded in mystery. But politically speaking, the Yingluck government has already sent an unequivocal message that the BOT must take the whole burden of the FIDF debt.

-- The Nation 2011-12-30

[Bakseedaa]

WoW.....the quick way to bankruptcy... hurry up and do it Yinluck... I want my 40 bahts to my $$$$s again... and with this plan , maybe a lot more....amazing Thailand.

[Pib]

Update: According to this Bloomberg news article titled, "Thailand's Government Scraps to Transfer Legacy Debt to Central Bank", the scheme to play a shell game with debt by transferring it to the BOT was scarped this afternoon.

But according to the Bloomberg article to help pay down the debt the govt did decide to take almost all of the funds commerical banks pay into the Deposit Protection Plan. I guess this means no real money will be in the Deposit Protection Program and folks will have to rely on the good faith of the government in covering deposits.

[animatic]

Of course this debt they want to offload, is residual debt from saving Thailands ass from the hopper after PTP MP Chavalit, backstopped by then Dep PM Thaksin, and other PTP coalition luminaries, setoff the Asian Tiger Crash of ASEAN in a short week.

So why do we still have debt from 1997 crash when Dr Thaksin using Thaksinomics PAID off Thailands debt when he took office, and got that nasty IMF off Thailands back...

Ignoirng that Thailand is a founding member of the IMF....

Shell game indeed.

But the shell is 10 years old and eyes are back on it yet again.

Edited December 30, 2011 by animatic

[animatic]

Bloomberg quote:

The government “didn’t study this issue well enough to argue with the Bank of Thailand,” said Pipat Luengnaruemitchai, vice president of Phatra Capital Pcl, Thailand’s second-biggest brokerage by market value. “Anything involving monetary policy discipline, the government loses the debate all the time because the Bank of Thailand has better credibility.”

Says it all right there.

Someone in a cabinet meeting throws out an idea,

and they just blurt it out, and then the backpedaling begins.

Bringing in Mr. Happy Smile, above, is not going to replace proper research into viable stratagies.

Edited December 30, 2011 by animatic

[TAWP]

[Pib]

Well, according to this 31 Dec 11/Saturday The Nation news article, "Ministers Face Off Over Debt", the idea of transferring the $45 billion FIDF debt to the BOT may not be a dead issue yet, especially based on this partial quote from the article: " Despite the finance minister's statement, Kittiratt, who heads the Yingluck government's economic team, insisted yesterday that the government's policy is to have the central bank take responsibility for both principal debt and interest expenses of the FIDF."

[phiphidon]

Of course this debt they want to offload, is residual debt from saving Thailands ass from the hopper after PTP MP Chavalit, backstopped by then Dep PM Thaksin, and other PTP coalition luminaries, setoff the Asian Tiger Crash of ASEAN in a short week.

So why do we still have debt from 1997 crash when Dr Thaksin using Thaksinomics PAID off Thailands debt when he took office, and got that nasty IMF off Thailands back...

Ignoirng that Thailand is a founding member of the IMF....

Shell game indeed.

But the shell is 10 years old and eyes are back on it yet again.

Was Thaksinomics really that bad?

COMMENT: The Asian Development Bank (ADB) states:

To gauge whether a country’s fiscal position is sustainable, the ratio of pubic debt to GDP is key

Thailand’s public debt increased from about 15 percent of GDP in 1996 to about 58 percent of GDP by end of 2000. Financing this debt absorbed 10.7 percent of government revenues in FY2000 compared with 4.5 percent in FY1996 (para. 15).

So Thaksin comes to power to find a dramatic increase in public debt with the government using almost 11% of revenues to finance this debt. Under Thaksin the ratio of public debt to GDP decreased from just under 58% at the end of 200 to 41.7% in 2006. Yes, you read that right the ratio of public debt to GDP fell under Thaksin. Far from there being a “mountain of debt” the country was in a much more sustainable fiscal position. The so-called “financial ruin” that Thaksin brought to the Thai economy included budget surpluses between 2003-2005.

http://asiancorrespo...dget-surpluses/

Todays ratio of Public Debt to GDP is around 42%. Compare and contrast to the Democrats proposed spending

Historic Investment under the “Thailand: Investing from Strength to Strength 2012” Project (07/09/2009)

The Government has announced a historic investment of 1.43 trillion baht, or 45 billion US dollars, to boost the Thai economy in the long run. The investment package is under the “Thailand: Investing from Strength to Strength 2012” project, known in Thai as “Patibatkan Thai Khem Khaeng 2555.”

The project was launched officially by Prime Minister Abhisit Vejjajiva on 4 September 2009 at the Grand Diamond Ballroom, Impact Convention Center, Muang Thong Thani, Nonthaburi province.

Prime Minister Abhisit said that Thailand’s public debt in 2012 was likely to increase to 58-59 percent of GDP and it would drop below 50 percent in 2016.

http://thailand.prd....404&type=inside

Would Thailands' fiscal position have been sustainable with those figures?

[Buchholz]

VERY appropriate to the proposed PTP shell game..... or 3 card monty.

.