Thai Government Scraps Plan to Transfer Debt to Central Bank

December 31, 2011, 5:53 AM EST

By Daniel Ten Kate and Suttinee Yuvejwattana

(Adds analyst?s comment in fifth paragraph.)

Dec. 30 (Bloomberg) -- Thailand?s government scrapped a proposal to transfer $35 billion of legacy debt from bank bailouts to the central bank and will instead seek to extract cash from commercial lenders to finance flood defenses.

?Transferring debts to the Bank of Thailand will be like printing money,? Finance Minister Thirachai Phuvanatnaranubala told reporters today after meeting Bank of Thailand Governor Prasarn Trairatvorakul. ?The methods we are using must not affect fiscal and monetary discipline and must not hurt confidence among foreign investors and international agencies.?

Deputy Prime Minister Kittiratt Na-Ranong said yesterday the step would save the government as much as 65 billion baht ($2 billion) in annual interest costs that could be used to fund anti-flood measures. Thirachai had opposed the measure, warning this week it could hurt investor confidence and stoke inflation.

The proposal increased concerns that Prime Minister Yingluck Shinawatra?s administration was infringing on the central bank?s independence, after Kittiratt in October said the Bank of Thailand should lower interest rates to help businesses cope with the country?s worst flooding since 1942.

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.?

Baht Gains

The baht gained 0.7 percent to 31.54 per dollar as of 3:06 p.m. in Bangkok, the biggest advance in a month. Yesterday it fell the most in two months to the weakest level since Aug. 16, 2010, according to data compiled by Bloomberg.

The government will attempt to raise about 50 billion baht for debt payments by taking 0.39 percent of the 0.4 percent fee that commercial banks pay to the Deposit Protection Agency and by amending the law to allow the Financial Institutions Development Fund to collect fees from commercial banks. The government paid 45 billion baht in interest on the debt this year, Thirachai said today.

?This will remove the interest burden from the government,? he said. ?If the central bank records a profit, they can also use that to reduce the debt.?

The Financial Institutions Development Fund racked up a 1.4 trillion-baht debt bailing out lenders after the 1997 Asian financial crisis, when the government closed more than 60 financial companies and seized half of the nation?s 14 commercial banks.

Bank Losses

Under a repayment agreement in 2002, the finance ministry makes interest payments while the central bank pays down the principal whenever it earns a yearly profit. The Bank of Thailand has reported annual net income once since 2004 and last year reported a net loss of 117 billion baht, mostly due to losses on foreign exchange.

Thailand?s central bank expects to record a loss this year, Prasarn told reporters today. Kittiratt yesterday said that it would post a ?high profit.? Prasarn said the Bank of Thailand, finance ministry and Council of State would meet again to discuss legal amendments to help pay the debt.

?We agreed that what we will do must not prompt the central bank to print money and it should help reduce the fiscal burden,? Prasarn told reporters today after the meeting. ?It must not affect foreign reserves too.?

Interest Payments

Since 1997, the principal on the debt has fallen by 300 billion baht, or about 21 billion baht per year. During that time, the government has paid as much as 65 billion baht in interest annually, according to Kittiratt.

Korn Chatikavanij, Thirachai?s predecessor under a previous administration, opposed the idea to transfer fees from the Deposit Protection Agency to the government to pay the debt.

?If you shift the revenue to the government, eventually the government would be morally bound to support banks if they run into liquidity problems,? he said in a telephone interview yesterday. ?The whole idea of having a deposit guarantee scheme is to avoid the government having to be involved.?

--Editors: Tony Jordan, Stephanie Phang

To contact the reporters on this story: Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net; Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net

To contact the editor responsible for this story: Chris Anstey at canstey@bloomberg.net

Source: http://www.businessweek.com/news/2011-12-31/thai-government-scraps-plan-to-transfer-debt-to-central-bank.html

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