Thailand's financial crisis: its causes, consequences, and implications

Journal of Economic Issues, March, 2007 by Jonathan E. Leightner

Institutional Consequences of the Crisis: Credit

When the value of the baht fell from US$1 for 25 baht in June of 1997 to US$1 dollar for 54 baht in January of 1998, the dollar value of Thai exports was halved and the price Thailand had to pay for imports doubled. Thailand fell into a serious recession. On August 19, 1997, Thailand accepted a US$17.2 billion from the IMF and the World Bank. This loan came with conditions, which would cause the Thai economy to contract further, but had the implicit goal of improving foreign investor confidence in the Thai economy. (3) One condition of the loan was that the Thai government not rescue additional financial institutions. By May of 1998, only 35 finance and securities companies remained of the original 91 and the Thai government took over seven of the remaining firms. The Thai government also took over four of Thailand's fifteen commercial banks (Leightner 2002).

The managers were fired at most of the financial firms that were shut down or taken over and the value of the shares of these companies was decreased to 1/1000th of their previous value. The Thai government issued a stern warning that if other financial firms did not get their delinquent loans under control, they would face the same fate. Out of fear, Thai financial institutions seriously curtailed the making of new loans (Leightner 2002). When financial firms stopped making loans, many debtors stopped paying on their current debts (called the strategic non-payment of loans). Debtors saw no financial advantage of paying on their current debts because not paying debts usually resulted in their being able to negotiate with desperate banks for more favorable payment options and maintaining a good credit rating is not advantageous if banks are not loaning. When the first prominent case of a nonpaying debtor was taken to bankruptcy court, the court threw the case out because the debtor had the money to pay its debts and, thus, was not bankrupt. Vongvipanond and Wichitaksorn (2004) show the bankruptcy court's top priority was avoiding the liquidation of firms. The strategic non-payment of loans and the reaction of the bankruptcy court caused banks to be even more reluctant to make new loans. The restructuring of corporate debt did not make significant progress until 2000 (Boonlai 2001) but even then the amount of new delinquent loans almost equaled the amount successfully restructured (Bunyamanee 2001).

The shortage of credit continues to haunt the Thai economy (Ingsrisawang 2001; Leightner 2002). State owned banks resumed some lending in 2001 under direct pressure from the government, but the private banks did not (Chudasri 2002; 2004). Even in 2005, Thai banks continue to hold more deposits than needed for the loans they make. Compounding the problem is the fact that extremely low interest rates do not give banks much incentive to lend. Most importantly, the Thai crisis caused possibly permanent changes in the institutional relationships underlying the giving and receiving of credit by (1) changing the number and types of financial institutions, (2) transforming previously cooperative relationships between borrowers and lenders into adversarial relationships, (3) undermining trust, and (4) creating a pervasive fear of government take over among financial intermediaries.