Don’t Blame Thailand for This Mess

Although the Thai government spectacularly botched its effort to rein in the baht over the last two days, the fact that the government felt obliged to try to halt the currency’s appreciation says more about financial global imbalances than about Thailand and its military-appointed government.

Just as the 1997 Asia financial crisis was kicked off by a falling baht that led to the unraveling of foreign-debt-driven Asian economies, this year’s baht crisis could be the precursor of dramatic currency market turmoil throughout Asia as the consequences of the global dollar surfeit and grossly misaligned exchange rates hit home.

To find the real culprits for Thailand’s problems, which are not unique, it is necessary to look no further than the United States, which appears to assume that it can go on dumping dollars on the rest of the world. Then glance over at China and Japan, which both refuse to allow the major currency adjustments that economic fundamentals demand.

As a result, the pressure for currency realignment in Asia is falling most heavily on the small and medium-sized economies that have sought to do the right thing and not impose currency controls. Thailand is one of those, having seen the baht rise 20 percent against the US dollar in two years and 7 percent in three months. Korea is another, with a rise of nearly 30 percent against the dollar in three years. Calls for measures to halt currency appreciation have also been growing louder.

Instead of currency coordination around Asia, the region is witnessing widening gaps. On the one hand are the currencies of Thailand, Korea, Singapore, Philippines and Indonesia, which have all appreciated significantly over the past year or more. Others have had none (the yen) or very little – 5.5 percent in the case of China and 6 percent for Malaysia, while the Taiwan dollar is actually 1 percent lower than two years ago.

This makes no sense at all given the interdependence of the region’s export economies and the fact that every one of them has a large current-account surplus and in most cases vastly excessive foreign exchange reserves accumulated in the effort to keep currencies cheap.

Thailand has experienced a steep rise in its currency despite the relatively modest size of its current-account surplus because it has an open market and attractive interest rates. Ditto Korea. The stock answer from the world’s leading speculator banks, such as Goldman Sachs, is that countries should cut interest rates. In other words they should abandon sound money policies and anti-inflation measures and join the US/China push for cheap money to further inflate asset prices and keep Wall Street in the money-printing business.

The controls were not Thailand’s mistake but the fact they were do poorly, applying restrictions to all financial capital flows, not just flows into risk-free bonds and bank accounts. (Indeed, in the first instance Asia Sentinel was told that the controls only applied to the latter, not to equity investments).

This stupidity is surprising. The current finance minister was the central bank governor under deposed Prime Minister Thaksin Shinawatra and had a reputation both for caution and belief in the benefits of open markets.

Though Thailand has been forced into a partial backtracking to rescue its stock market, the episode will likely leave its mark on other countries. The likes of Malaysia and Taiwan are now even less likely to remove currency controls, whether formal or informal. This will further slow the process of exchange rate adjustment unless China is willing to drastically speed up yuan appreciation and Japan to raise interest rates to the point where the carry trade merchants are forced to cover themselves, hopefully enduring mega losses as the yen powers to100 or less to the dollar.

The yen is now at an all time low against the euro and has fallen more than 25 percent against the won over the past two years. No wonder the Koreans are unhappy. Won appreciation has not done them much damage in the US or European markets, but it certainly does not help them compete against rivals from Japan, Taiwan and China.

Likewise, Southeast Asia in general was already suffering from the gravitational pull of manufacturing investment towards China. Being in receipt of financial capital which has driven the region’s currencies is seen to have further reduced their competitive edge.

Fears of over-rapid appreciation can be overdone. New Zealand and Australia have for years lived with very volatile currencies without seeming to suffer. However, the Asian region, still scarred from the 1997 crisis, is naturally wary of the disruptive effect that fast inflows and outflows can have.

Asian governments should be wary of a world made to suit Wall Street investment bank cowboys with their multi million dollar pay packets and ever more highly leveraged positions. If you want to know why the financial world is on a precipice don’t look at Thailand’s troubles but consider instead the mega bonuses being paid out by Wall Street this year. US Treasury Secretary Henry Paulson’s old firm, Goldman Sachs, alone made a net profit of US$9.5 billion after paying an average bonus of $622,000 per employee and $54 million to the boss who succeeded Paulson only five months ago – a total of US$26 billion in remuneration. No wonder the world wants baht, not greenbacks.