Bank of Thailand Keeps
Its Claws on Speculators

By DARREN MCDERMOTT
Staff Reporter of THE WALL STREET JOURNAL

SINGAPORE -- Speculators who thought they could eat the Bank of Thailand's lunch by forcing a devaluation of the baht are choking three weeks later on the fiery platter of intervention served up by the central bank.

Boosted persistently by central-bank purchases of baht in the offshore market, the Thai currency has been rising all week. On Thursday, it hit a 13-year high of 23.750 per dollar in trading here. (In late trading in Bangkok Thursday, the baht was quoted around 25.83 per dollar.)

The offshore rate represents a loss of nearly 10% for investors who sold the currency three weeks ago at more than 26 baht per dollar, betting that they could buy it back later for a cheaper price if the currency devalued. Such bets against the baht, called short sales, have resulted in hundreds of millions of dollars in losses for hedge funds, life-insurance companies and the proprietary-trading arms of banks, traders say.

Bet on Rate Cut

The Bank of Thailand has long held the baht within a narrow trading range determined by the value of a basket of currencies, dominated by the U.S. dollar. In recent months, however, Thailand's economic slowdown and property-lending crisis have undermined investors' faith in the central bank's ability to maintain that range. The central bank has had to rely on high interest rates to induce investors to hold the currency. Those high rates, in turn, squeeze Thai borrowers dangerously. Short sellers last month were betting that Thai authorities would become so desperate to provide relief to borrowers that they would cut interest rates and let the baht plunge below its official range.

Instead, the Bank of Thailand caught short sellers off guard by ordering Thai banks to stop lending baht to foreigners who don't have genuine commercial or trade needs for the currency. That created a two-tier currency market, with one tier in Thailand, and another offshore. In the offshore market, speculators suddenly faced a severe shortage of baht when they tried to cover their positions.

The Bank of Thailand's aggressive defense of the baht does nothing to improve the country's long-term economic woes. But the Bank of Thailand's tough stance, backed by other central banks in the region, has served notice on the foreign-exchange market that Southeast Asian central banks can be highly adept at managing their currencies.

'Big Stick Approach'

"I think they are using the big stick approach," says Wong Yit Fan, chief economist for Southeast Asia at Standard Chartered Bank in Singapore. "They want to hit speculators so very hard that they won't think about speculating on the currency for another six months."

Traders say the carnage could go on for months. That's because investors hold agreements to buy back their baht at widely varying times. Before the attack, it wasn't uncommon to sell baht as far as 18 months forward, meaning that there are unknown quantities of short positions in the market. As these contracts mature, investors will be forced to buy baht to meet their obligations.

"There's no telling; the baht could go to 22" per dollar, Mr. Wong says.

All this has come as a rude shock to some market players, who long felt that the baht was overvalued and concluded that Thailand wouldn't be able to sustain the capital controls barring offshore lending of the baht for more than a few weeks. Rumors that the Bank of Thailand had lost tens of billions of dollars in its defense of the baht swept the market last month, generating speculation that the authorities would have little cash left to continue protecting the currency.

'Dangerous' Idea

That appears not to be the case. "All this talk [the Bank of Thailand] lost $15 billion to $20 billion is hugely overestimated, and building a trading position on that idea would be very dangerous," says Desmond Supple, head of Asian currencies research at Barclays Bank PLC. "They're going to keep this squeeze on. They are committed to inflicting more pain and making people pay for fighting them. By showing the extent of their commitment, it does reduce the risk of a new speculative attack, at least for a time."

There are no guarantees on that score, however. The abandoning of short-baht positions this week is "capitulation" to the short-term pain the Bank of Thailand has inflicted, says a foreign-exchange salesman in Singapore. "It's not an assessment of the Bank of Thailand's ability to defend the baht. I don't think that managers of people who take risks are going to allow them to continue to run those risks. But that doesn't mean that they won't come back."

Still, in the short term, the Bank of Thailand appears to have the upper hand. Angus Armstrong, Deutsche Bank's chief economist for the Asian-Pacific region, says the Bank of Thailand can "easily" leave the controls in place for several months. At some point, however, the restrictions could shut off the flow of foreign investment and financing on which Thailand depends.

Companies already doing business in Thailand are allowed to move money in and out freely if they can show it's connected to genuine trade flows, in the same way that foreign companies in Singapore must show commercial cause for borrowing more than 5 million Singapore dollars (US$3.5 million) in the local currency. So far, there have been few reports of companies unable to move money or to hedge their currency exposure in the domestic market, economists say, though there are suggestions that doing so is getting more expensive.

But eventually, says Barclays's Mr. Supple, a two-tier market in the baht will "field a perception that the baht is unsustainable in a free market." If investors don't have confidence that the baht won't collapse when the two markets eventually are united, he says, "the risks to long-term investment start to rise. That confidence can't survive in the current system for many months."