The Big Challenge As Currencies Face Collapse; Thai Opinion

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OVERDRIVE

The big challenge as currencies face collapse

Thanong Khanthong

BANGKOK: -- The Bank of Thailand is facing one of its greatest policy challenges ever: how it will manage its foreign reserves of around US$200 billion amid the global currency war. For Thailand's reserves - which back the baht currency and international transactions - are mostly backed by international reserve currencies that might become worthless. If the dollar or the yen, in the worst-case scenario, were to become worthless, our reserves would also become worthless. That would be amount to a repeat of the 1997 financial crisis when the baht crashed through the floor.

Let's examine the latest situation involving all the major global currencies. Kyle Bass of Hayman Capital Management said the yen is toast. At 24 times central government tax revenue, cumulative Japanese government debt has reached a level that ensures financial collapse. Recently he told CNBC that the yen would collapse over the next 18 to 24 months from a sudden swing in expectations. The Japanese government will not be able to rein in runaway debt and Japanese government bond bubbles against the impending rise in interest rates.

The euro has stabilised so far. But the fundamental sovereign debt problems have not been resolved. The Spanish and Greek banking systems have negative capital. Europe's banking system is worth about $46 trillion, while its gross domestic product is around $17 trillion. This implies that government money won't be able to bail out the banking system. The European Central Bank might end up printing unlimited money to spark off a euro crisis. Greece might seek an exit from the euro zone sooner rather than later.

And Germany now wants its gold back. Germany's total gold reserves stand at 3,400 tonnes, the second largest in the world after the US. It is seeking to repatriate its gold from the vaults of the Federal Reserve of New York, the Bank of England and the Bank of France. By doing so, Germany is sending an indirect signal to the financial markets that it is also preparing to exit from the euro zone too.

Germany knows that it can't bail out the entire euro zone. The gold shipped back home to Frankfurt could be used to back the Deutsche mark when Germany eventually reverts to its own currency. The question is whether the central banks still hold Germany's gold or only receivables. If Germany were to leave the euro zone, it would spark a euro crisis of galactic proportions.

The US dollar is also facing a crisis of confidence. The timing to watch is March onward, when the White House and the Republican-controlled Congress will negotiate the US debt ceiling of $16 trillion. Given the animosity between the Democrats and the Republicans, the conflict might spill over into the financial markets, resulting in a collapse of confidence in the US Treasuries market. If buyers of US Treasuries do not show up and the Federal Reserve can't compensate for all shortfalls, the dollar will tank. A dollar default looks increasingly possible.

The US's balance sheet looks ugly. The US debt is $16 trillion, equivalent to 100 per cent of the GDP. The US government's budget in 2012 was $3.8 trillion. Tax revenue was around $2.5 trillion, resulting in a budget deficit of $1.3 trillion. But the US off-balance-sheet debt is believed to exceed $80 trillion, which is by far higher than the world's GDP of $60 trillion. In fact, John Williams of Shadowstats believes that the US is creating $7 trillion in new debt every year. Since this is the case, the US Federal Reserve will have no choice but to monetise the government debt indefinitely. The dollar collapse is a matter of time.

Of the Bank of Thailand's $200 billion in reserves, 50 per cent is denominated in US dollars, 25-30 per cent in the euro, 10 per cent in Asean currencies, 5 per cent in the yen and 3 per cent in gold. This is my own estimate from conversations with BOT officials. If the major currencies of the world, such as the dollar, euro and yen were to crash, the Thai central bank's reserves would lose value in a hurry.

The way out is to walk away from the current global financial framework. How about putting half of the Bank of Thailand's reserves into a swap agreement with the Bank of China for yuan? The yuan will rise when other global currencies collapse. The central bank then can add more gold and other regional currencies to its reserves as a diversification of risks from the global currencies. Gold should have been accumulated earlier when its prices were cheaper.

There is not much time left to protect the country's reserves. But it is better late than never.

-- The Nation 2013-01-25

[bigbamboo]

If the dollar, euro and yen were to crash it would not just be a Thai problem .... it would be global. And they should think themselves lucky they didn't have the economic genius of Gordon Brown costing the nation a fortune selling off gold when the price was rock bottom. Come to think of it Thailand must be swimming in gold only most of it is hanging around hi-so necks.

[cloudhopper]

Good article except for the bit about the yuan, which is rubbish. The relatively large amount of privately held gold will serve the country well.

[chooka]

The Aussie dollar is looking pretty safe at the moment. Good for expats living in Thailand but not so good for those manufacturers and exporters in Aust.

[tboxcar]

If what the author of this article said did come true,

If the dollar, euro and yen were to crash it would not just be a Thai problem ....

The result world wide would be so catastrophic, resulting in the collapse of all currencies, to think that the Yuan would be a safe haven, is the just the author's dream.

[yoshiwara]

Managing Editor of the Nation, Thanong Khanthong, is a fully paid-up member of the end of the world gold bug fraternity and his editorials should be viewed accordingly. Quite embarrassing. I look forward to free aluminium hats being given away with future business supplements.

[chiang mai]

Indeed, nothing more than a thinly veiled advertisement to buy gold.

[angsta]

The Nation.

That is all.

[jpinx]

The ostriches do not see that the US dollar is actually worthless now. It is propped up by reputation and the sheer numbers of people using it. Gordon Brown certainly did kill sterlings chances of retaining world predominance alongside the greenback. Germany is not going to abandon the euro, but they are making sure that their gold is not "lost" when the US dollar collapses. When a few of the renegade euro users leave the euro, Germany and France will be well-placed to control the future of the euro, no need to revert to the deutchmark.

The article is correct in forecasting that China will predominate in the future. They ave been building their holdings of US debt and even today they could probably cause a total collapse of the dollar just by calling in the debt.

As for Thailand -- they suffer from a policy of abandoning gold and now will need to align with something other than the dollar. Interestingly - Thai policy went 100% against the populations wishes. There must be a fair amount of gold held privately. I wonder if there are any estimates of how much.....

[Lancelot]

I don't like the ongoing US budget deficiets; however, predicting that foreign central banks will not show up for US Treasury auctions might be a bit premature.

The Chinese buy US bonds, not because they like us but in their own intrests, supporting the value of the US dollar. If the USD were to collapse, it would be a bit messy on the Chinese domestic scene, higher unemployment, social and political unrest...

But hey, if the USD falls to 15 baht, I'll soldier right on

PS- Some Soi Cowboy Go-gos charge 180 baht for a small bottle of beer; so much for inexpensive night life

[yannic]

I haven't read so much rubbish lately as far as it concerns Germany, they will never leave the Euro zone.

[Orac]

I an no economist but if the dollar, yen and euro become worthless then what currency is he measuring the Baht against which will cause it to crash through the floor unless he is anticipating that the baht can somehow become less than worthless.

[jefro]

Stack you GOLD bitchez !!!

[IMA_FARANG]

Not sure of the facts stated ... but some VERY interesting information there regarding the exact percentages of Thai foriegn reserve assets and what the effect of a Thai Baht "strengthening" would really be.

In real world economics. there is no black and white "good" result.

Everything has it's price... it's "cost"

Like the saying goes:

Be careful what you ask for or you might just get it; and your "dream" might just turn out to be a "nightmare".

[fish fingers]

the dollar and euro have already lost value over the last 5 plus years.. the yen WILL lose value now but they don't have much stake compared ..and the baht is where it is, v strong position imo. They need to keep the currency value where it is, or 40-45 against sterling maximum

[Tatsujin]

Is TV sure this article came from "The Nation" rather than "Not The Nation"?

[antiscam]

Quote "By doing so, Germany is sending an indirect signal to the financial markets that it is also preparing to exit from the euro zone too."

I wonder what kind of journalist wrote this article but one thing is clear he/she should write about sports news or gossip news instead of economy. To say tha Germany is also preparing to exit from the Euro zone is the biggest stupidity I have hear since the beginning of this year.

Germany will never leave the Eurozone and will always help to keep a strong Eurozone. Why ? Because since the Euro exists Germany sold much more products within Europe that used to represent 75% of its exportation (less now). The European currency helped Germany to stay one of the biggest and most competitive economy in the world. Thanks to Schroder's reforms 10 years ago Germany took all the advantages of using the Euro. Germany without Euro would loose a big portion of the customers who buy its products and the Deutche Mark would be overvalued compared to the other European currencies. Their competitiveness would be destroyed and their exportations would suffer a lot.

This article treats an interesting subject in a very bad and false way.

[antiscam]

Good article except for the bit about the yuan, which is rubbish. The relatively large amount of privately held gold will serve the country well.

Poor you, you don't know anything about economy. This article is just rubbish. Saying that Germany is preparing to leave the Eurozone is the biggest one I heard since long time.

Go on Wikipedia and you will know more about economy. Don't read and believe this article, it's only rubbish !

[NoshowJones]

If the dollar, euro and yen were to crash it would not just be a Thai problem .... it would be global. And they should think themselves lucky they didn't have the economic genius of Gordon Brown costing the nation a fortune selling off gold when the price was rock bottom. Come to think of it Thailand must be swimming in gold only most of it is hanging around hi-so necks.

Brown was the biggest liar and hypocrite that ever came out of the UK, just like all Labour politicians, Labour are bigger liars and crooks than all the political parties put together.

[antiscam]

I haven't read so much rubbish lately as far as it concerns Germany, they will never leave the Euro zone.

I 100% agree with you ! How come he can write that Germany will leave the Eurozone ??

[bigbamboo]

I haven't read so much rubbish lately as far as it concerns Germany, they will never leave the Euro zone.

If Germany did leave the Euro zone there wouldn't be any more Euro zone.

[fish fingers]

Germany might set up a new eurozone. did u think of this?

[hansnl]

I haven't read so much rubbish lately as far as it concerns Germany, they will never leave the Euro zone.

Why then did Germany call back it's gold?

Rumours are The Netherlands are planning the same.

Maybe we will see the NEURO (Northern Euro)

But my bet?

Byebye Euro.

[Tatsujin]

Brown was the biggest liar and hypocrite that ever came out of the UK, just like all Labour politicians, Labour are bigger liars and crooks than all the political parties put together.

. . . except of course for those here in Thailand . . .

[Tatsujin]

I haven't read so much rubbish lately as far as it concerns Germany, they will never leave the Euro zone.

I 100% agree with you ! How come he can write that Germany will leave the Eurozone ??

I can foresee that a lot of the countries in the future will move out of the Euro and go back to the way things were before.

[Lancelot]

Thanks to Schroder's reforms 10 years ago Germany took all the advantages of using the Euro. Germany without Euro would loose a big portion of the customers who buy its products and the Deutche Mark would be overvalued compared to the other European currencies. Their competitiveness would be destroyed and their exportations would suffer a lot.

I agree.

Germany has done OK by the Euro and its relative weakness has been great for (German) exports.

[NoshowJones]

Brown was the biggest liar and hypocrite that ever came out of the UK, just like all Labour politicians, Labour are bigger liars and crooks than all the political parties put together.

. . . except of course for those here in Thailand . . .

I was referring to the UK, though I think it is up for debate which country has the biggest liars and crooks in politics.

[LALes]

This guy sounds like a shill for China. When all these currencies collapse, what will keep China from going down, as well?

Maybe they won't fall as far, but they will certainly take a dive. We're all in this thing together, now, for better or worse.

[draftvader]

I didn't know that comic books were now doing financial editorials....bit unexpected!

[Suradit69]

I an no economist but if the dollar, yen and euro become worthless then what currency is he measuring the Baht against which will cause it to crash through the floor unless he is anticipating that the baht can somehow become less than worthless.

The exchange rates for the baht are an important part of the baht's value, but most people don't assess its value ( or the value of any home currency, whether the baht or pound or dollar) by checking the exchange rates. Most people consider the value in terms of what "stuff" they can get in exchange for it or what their monthly salary will stetch to include.

If you bought a two baht gold piece for B40,000 a few years ago and it now costs B55,000 that may be significant for you. More importantly, if you could buy chicken, rice, medical treatment, a bus ticket to Bangkok or whatever for a certain amount and now you need 25% more to get the same "stuff," that's what counts.

I lived for awhile in an African country (not Zimbabwe). When I first arrived I bought a VW Beetle for 1200 local currency units. Now a small bottle of Coke costs 4 times that amount, 5000 units of local currency. For that matter, when I was young a Coke cost 5 cents in the US. Now a can of Coke can cost from 50 cents to a dollar.

The only value any currency really has is what things you need/want that you can get in exchange for it.