Bank of Thailand fights baht speculators

Bank of Thailand fights baht speculators

BANGKOK (AFP): Thailand's central bank has renewed a request for commercial banks here to avoid offshore baht loans in a bid to ward off further speculative attacks on the currency, an official said yesterday.

The Bank of Thailand asked commercial banks in a letter last week to avoid swap transactions, direct lending, overdrafts and any other non-resident lending that could be used by speculators on the Thai currency, the official said.

The "letter of understanding," received by local and foreign commercial banks here, clarifies earlier requests for cooperation made by telephone during a speculative assault on the baht in mid-May.

The Thai unit then sank to its lowest level in 10-and-a-half years, before rallying as the Bank of Thailand and Southeast Asian central banks intervened in foreign exchange markets to drive baht levels back up.

The central bank official, who refused to be named, said that informal contacts with commercial banks were good, but the letter would serve "to make sure that everybody was doing the same thing."

"These are only a temporary measures. Once the bank feels there is no threat of speculation, it would rescind these requests," said the official, adding that no exact timeframe was specified.

The limitations on lending do not prevent commercial bank lending for stock investment, bonds or property, provided transactions are supported by the necessary documentation, the official said.

A sharp drop in exports and a persistent current account deficit has led to pressure for a devaluation of the baht over the past year -- a move strongly resisted by the government.

Although a devaluation could be a boon to Thailand's largely export-driven economy, such a move is seen as prohibitive as it would increase the country's overseas debt-burden, much of it foreign borrowing to the Thai private sector.

After the speculative run on the baht last month, the central bank boosted short-term interest rates for overseas investors in a move to hit speculators with huge interest bills.

A foreign bank dealer in Bangkok commented that baht speculation had become a dangerous undertaking because of the high penalties of holding an overdraft in a non-resident account.

"If you don't have enough baht in an account here and you try to speculate by buying dollars and selling baht, you can get burned very badly when you're overdrawn," he said.

Overnight interest rates in offshore markets had reached as high as the equivalent of an annual rate of 1,500 percent during the recent attack on the baht.

"If the government can't solve the fundamental economic problems, another attack could be in the offing. It seems the authorities have no intention to devalue or make any change in the currency system," added the dealer.