High inflation seen from money printing to settle FIDF debt: Teerana

“Monetisation, the printing of money to repay debts, would lead to high inflation and ordinary people would suffer from ‘inflation tax’ – a rise in goods prices,” said Teerana Bhongmakapat, professor of economics and dean of Chulalongkorn University’s economics faculty.

“If the central bank agreed to repay the debt of Bt1.1 trillion owed by the Financial Institutions Development Fund [FIDF] over 10 years, inflation would roughly rise by an extra 1 percentage point annually,” he said, referring to Finance Minister Thirachai Phuvanatnaranubala’s attempt to transfer FIDF debts back to the BOT.
 

“It would be unfair on consumers,” he warned.
 

Thirachai on Tuesday asked BOT Governor Prasarn Trairatvorakul to conduct a study on debt repayment by the central bank.
 

The minister argued that the government had borne a high burden for the debts for years, to the tune of about Bt65 billion annually for interest payments alone.
 

Teerana said that until now, no government had taken responsibility for the repayment of public debt flowing from the 1997 financial crisis.
 

“The best solution is a tax rise for debt repayment, not monetisation,” he suggested. “The Finance Ministry could impose a tax on the rich, such as bankers, who gain the most from economic growth.”
 

The FIDF’s debt overhang of Bt1.1 trillion, representing about 10 per cent of gross domestic product, is a leftover from the 1997 crisis, when there was a huge bail-out of financial institutions.
 

Printing money to repay the debt would dent investor confidence, too, as investors would be scared off by the high inflation resulting from the central bank’s action, Teerana added.
Thirachai and Prasarn have agreed to set an annual target for headline inflation at 3 per cent, plus or minus 1.5 percentage points. However, monetisation of the FIDF’s debt could result in inflation shooting off-target, the economist said.
 

The BOT chief earlier expressed concern over the effect on investor confidence if the central bank had to print money to repay debt, as investors might see the institution as taking an irresponsible stance on monetary policy.

BONDS
 

He also said the central bank could face more financial losses from such a monetisation operation, because it would have to draw money back by issuing bonds to curb inflationary pressure, resulting in a rising cost of bond-rate payment.
 

 Teerana also said the European Union could face more trouble as its leaders had not yet found effective solutions for the euro-zone sovereign-debt crisis, besides which the market believes the Greek government will default on the country’s debts.
 

More European countries may face a downgrading of their sovereign credit, after the decision by Moody’s rating agency on Monday to slash Italy’s credit rating from Aa2 to A2. The agency cited the country’s high public debts and a loss of confidence in euro-zone governments in announcing its move.
 

“A credit-rating cut would lead to slower economic growth, and slower growth would adversely affect a credit rating; a credit-rating cut is pro-cyclical,” said Teerana.
 

He warned that a contagion effect would then spread to Japan and the United States, both key export markets for Thailand. Exports to the EU, Japan and the US represent about 30 per cent of the Kingdom’s overseas sales.
 

Teerana said Greece might have to leave the euro temporarily, otherwise the crisis would persist throughout the zone using the common currency.
 

Greece cannot recover because it is stuck with a strong euro, whereas the country needs a much weaker currency to make it competitive, he added.
 

Meanwhile, Vorapol Socatiyanu-rak, newly appointed secretary-general of the Securities and Exchange Commission, said he was optimistic despite the current woes, as Thai listed firms remain strong because of a relatively low debt level, while exporters could sell to other markets and offset a slowdown in exports to troubled advanced economies.