Debt diversion will do more harm than good

Bank stocks fell sharply yesterday in reaction to the government’s plan to force banks to pay a higher surcharge. This is part of the government’s decision to transfer the outstanding debt burden from the 1997 financial crisis – the Financial Institutions Development Fund (FIDF) – from the Finance Ministry to the Bank of Thailand.

The plan, which is pending the Council of State’s interpretation, will raise the surcharge on local banks to around 1 per cent of their deposits, up from the 0.4 per cent currently. 

The Finance Ministry plans to use the money from the new surcharge to help finance its debt repayments.

However, this decision could affect the economic recovery process as an additional surcharge on banks will eventually come at the expense of their customers – because the commercial banks are likely to pass the cost on to account holders. In addition, it will create confusion in the financial markets. 

Aside from the effect on ordinary depositors and pensioners, who rely on their savings, this seemingly hastily-arranged programme will affect overall confidence in the government’s economic management strategy.

The drop in the banks’ stocks is just the tip of the iceberg. In fact, the government’s plan to transfer the outstanding debt from the 1997 financial crisis, to pave the way for the government to borrow more to spend on risky populist schemes, could affect the confidence of investors, who are concerned about the country’s monetary discipline.

The lack of details of this programme – like so many other government plans – will raise questions over its sustainability. The government is supposed to be supporting the recovery process in the wake of last year’s devastating floods. But there are new concerns that additional public debt will quickly be squandered at the expense of the taxpayer.

What the government has focused on so far is simply the amount of money it plans to gain from the transfer of the debt from the Finance Ministry to the central bank, as well as a series of spending programmes to finance its populist pledges. This is on top of the money needed for the flood recovery effort.

In fact, the key economic ministers in the Yingluck government do not seem to fully agree on the decision to transfer the debt to the central bank. Finance Minister Thirachai Phuvanatnarabubala reportedly questioned whether it was necessary to fast track the FIDF transfer before the details of the investment programmes were completed.

Deputy Prime Minister Kittiratt Na-Ranong, however, defended the proposal by saying the transfer of debt would give the government room for new investment to help in the recovery of the economy. 

Kittiratt said the transfer of the FIDF loans would free up Bt65 billion a year now allocated for debt payment by the government. The shift of debt would allow the government to take out additional debt under the budget rules, which require debt service obligations to remain under 15 per cent of budget expenditure, currently set at Bt2.38 trillion for the fiscal year 2012.

However, the ballooning level of public debt will not guarantee economic management success unless the government has effective steps to implement its programmes in a sustainable and efficient manner.

Now, the central bank is likely to come under pressure to monetise the debt if it has to take on debts owed by the FIDF. The central bank lacks the income to pay down the FIDF debt. If investors question the credibility of the fund’s debt, they will demand higher interest payments for the FIDF bonds in the future.

The Cabinet’s decision to divert funds that now go to finance a system-wide deposit insurance programme, to help the government finance the repayment of the debt, will also raise questions about the health of the scheme in the future.

The government’s failure to eloquently defend its plan during the budget debate this week was not a good start in attempting to shore up the confidence of investors over the effectiveness of its programmes.