RI woes overshadow Thailand credit cut

RI woes overshadow Thailand credit cut

NEW YORK (Reuters): Thailand's financial assets came under another round of pounding Thursday, as the meltdown of Indonesian markets sent fresh shock waves through the region, U.S.-based traders and analysts said.

In the maelstrom, the one-notch downgrade of Thailand by the U.S. rating agency Standard and Poor's was irrelevant as the country's debt had traded way below the level of the slashed rating, traders said.

"It was like a mosquito bite on a car-crash victim," quipped one trader.

S&P lowered Thailand's long-term foreign currency credit rating from BBB to BBB-minus, just at the limit of investment grade. Back in December, rival agency Moody's Investors Service had already slashed the rating to junk grade Ba1, equivalent of BB-plus on S&P rating scale.

The Kingdom of Thailand yankee bond maturing 2007 was bid 600 basis point over U.S. Treasuries and offered 475 over. It was bid 500 bp over earlier in the week.

Traders said selling pressure on the Thai financial assets stemmed mainly from the swift and sharp fall of the Indonesian rupiah, which breached the 10,000 per dollar level on Thursday.

It was quoted 10,700, from 7,900 late Wednesday, a whopping 28 percent plunge.

Indonesian President Soeharto's 1997-1998 budget unveiled on Tuesday shocked financial markets with its flagrant disregard for the austerity measures needed to receive $40 billion loan package led by the International Monetary Fund (IMF).

Thailand on Monday asked to renegotiate the terms for the $17.2 billion IMF bailout package, which required Thailand to produce a cash surplus equivalent to 1 percent of its gross domestic product in the October 1997 to September 1998 fiscal year.

The IMF terms on the Thai budget surplus were likely to be modified, but the deepening Indonesian crisis put Thailand in a difficult position, said Feroz Talyarkhan, managing director of Asian fixed income research at Bear Stearns and Co.

As prospects of the IMF pulling the plug on Indonesia grew more certain, the pressure on the Thai baht would not abate, he said. The Thai baht on Thursday fell to a record low of 54.05 on the offshore market.

"If Korea is too big to fail, Indonesia will not be treated the same way (by the IMF)," said Talyarkhan.

He said that by letting Indonesia default on its loans, the IMF would demonstrate that it would not bail out financially troubled countries that fail to comply with its conditions.

In the face of rising default risks, all bids for Indonesian sovereign bonds maturing 2006 were withdrawn, according to trading sources. Early in the week, the bid was 625 bp bid and 550 bp offered.

James Conklin, currency strategist at Lehman Brothers, said the Indonesian budget dashed hopes for financial stabilization as that the government was assumed ready to print money to meet the targets.