Thailand's late July request for assistance from the International Monetary Fund brought a certain sense of deja vu to some officials at the Washington DC headquarters of the IMF and the World Bank. 'A plunging currency, high short-term debts, troubled financial institutions . . . where have I seen that before?' mused one World Bank official the day before Bangkok announced an IMF package to rescue the country from the brink of bankruptcy. Nearly three years ago, a similar crisis in Mexico threatened the stability of the US banking system and rattled emerging markets from Rio De Janiero to Manila. The IMF, together with the US Treasury, stepped in with a bailout package that took the country out of immediate danger, though the damage done to investor confidence towards emerging markets lingered for more than a year. The story in Mexico had a happy ending, for most. The country swallowed the bitter recommendations of the IMF and turned its economy and its financial markets around with amazing speed. The US$50 billion bailout, put together by the IMF and the US Treasury, was repaid before it was due. Some of the rescue funds were never touched. Confidence returned. The nation's poor suffered under the fiscal constraints imposed on Mexico by the IMF, but the country won favour in the international investment community. Not so for Thailand. Bangkok has yet to convince anyone that it has the political will to see through the painful and politically unpopular reforms necessary to turn the country around. Moreover, Thais are already taking to the streets to protest the fiscal and monetary measures that are conditional on Bangkok receiving its own $17.2 billion rescue package. IMF officials are barely concealing their frustration. Bangkok has been politely ignoring the IMF's advice since early 1995, when alarm bells first began to sound. Now, talk is rife that the IMF may withhold the next tranche of the Thai rescue package because Bangkok will fail to meet criteria laid out in July. Thai officials no doubt have a lot of explaining to do this week in Hong Kong, where they will meet not only IMF officials, but a cross-section of the international investment community. Without the confidence of international investors, Thailand cannot turn around its troubled banks, revive its tattered share market or prevent further erosion of the baht. Unfortunately for the country, these difficult decisions must be made even as the political arena is roiled by deep political divisions over rewriting the country's constitution. In Mexico, it was the return of capital from overseas that quickened recovery - even though Mexico's troubles looked worse than those now afflicting Thailand. Years of economic mismanagement were forgiven after Mexico City took clear and decisive action to put things right in the country's financial and fiscal systems. History shows that emerging market investors have short memories. In Mexico, the first hint of trouble came on January 1, 1994 - nearly a year before the situation blew up internationally - when rebels in the state of Chiapas seized control of six towns. Then, across the border, the US Federal Reserve began cranking interest rates higher. Five separate times the Fed raised rates, taking key money market rates from 3 per cent in early February to 5.5 per cent by the end of November, destroying a few bond portfolios, roiling global equity markets and raising the cost of borrowing for most countries. The March assassination of Luis Donaldo Colosio, ruling party presidential candidate, created political uncertainties that stabilised briefly in the summer, only to surface again when another ruling party official was assassinated. Meanwhile, violence erupted in the state of Chiapas in December, which helped push financial markets over the edge. By the end of 1994, the government had spent nearly all its foreign reserves defending the peso before a newly elected Mexican government let the currency go on December 20. The peso lost more than half its value before it hit bottom in March 1995 - far worse than anything the baht has seen. Thailand's eventual meltdown also had its roots in politics. Thailand's fractious political coalitions came and went with few tough decisions being taken. The revolving door at the Ministry of Finance has left the IMF and the rest of the world wondering just who is running the economy. Meanwhile, measures introduced in the early 1990s to create an offshore financial centre in Bangkok made it easy for Thai banks and corporates to borrow cheap offshore funds, which led to rapid credit expansion that reached unsustainable levels a few months ago. Analysts claim that only the biggest banks are solvent and many smaller institutions would have collapsed had the government not closed their doors. At least 58 financial houses have been closed by the government, some of them for months, awaiting word on their future. Mexican banks faced a similar liquidity crisis in January 1995. Throughout 1994, Mexico held domestic interest rates low, even though rates across the border and in the rest of the world were rising. An easy money policy led to an expansion of domestic credit that helped push the current account deficit to 8 per cent of GDP that year from 6.4 per cent in 1993. Credit growth exploded with a new short-term debt security, paid in pesos but indexed to the US dollar, called Tesobono. Many banks had borrowed in dollars, using Tesobonos as collateral. So much short-term debt in the form of Tesobonos matured in the early months of 1995 that no one wanted to touch the instruments by the end of 1994. The Tesobono market teetered, threatening the entire banking system. But Mexico moved quickly to rescue its financial institutions by opening banks to 100 per cent foreign ownership the day after the IMF package was announced. On the same day, business and labour representatives worked out a package with the government to restrain wage and price increases, which were growing at a double-digit annual clip by early 1995. Thai officials may have followed a similar path to disaster, but they have clearly not learned much about crisis management from the Mexican experience. Thailand has yet to take any decisive action. Failing to embrace the tough love of the IMF could well leave the country sinking into recession, and international investors looking elsewhere for a developing Asia recovery play. Next month Thailand faces its first quarterly review from the IMF and Thai officials must demonstrate they will live up to their reform promises or face the world without the fund's backing. If this rescue package unravels, what next for Thailand?
