Depositors to bear the brunt of the legacy debt from 1997
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Bank depositors will eventually have to bear the burden of settling the massive Bt1.14 trillion public debt that resulted from the 1997 financial crisis, if the Yingluck government has its way.
On December 27, 2011, Prime Minister Yingluck Shinawatra’s Cabinet agreed in principle to issue an executive decree to pass on the responsibility of paying back the huge legacy debt, as well as its annual interest burden of Bt45-60 billion, to the Financial Institution Development Fund (FIDF) of the Bank of Thailand.
During the 1997 “Tom Yum Goong” financial crisis, the FIDF was ordered by the government to bail out failed commercial banks and finance companies to protect depositors.
Later, the Finance Ministry assumed responsibility of the FIDF’s massive debt. Over the past few years, the Finance Ministry has been paying an annual Bt45-60 billion in interest on the principal debt, which is currently about Bt1.14 trillion.
Citing the country’s recent worst floods in many decades, Dr Virabongsa Ramangkura, chairman of the government’s strategic committee for post-flood reconstruction and future development, proposed that the government should transfer the legacy debt to the central bank’s FIDF so that the government has more financial resources to invest in mega-infrastructure schemes.
The country’s public debt ratio to GDP will drop to around 30 per cent from the current 40 per cent if the legacy debt is transferred, according to Virabongsa.
Deputy premier Kittirat Naranong, who oversees the government’s economic policy, said earlier that the central bank would have to comply with the law on FIDF debt transfer to be issued by the government.
To avoid direct impacts on the central bank, the government would amend the Institute of Deposit Protection Act (DPA) to divert its funds to cover interest expenses on the Bt1.14-trillion principal debt.
The Institute of Deposit Protection currently collects 0.4 per cent on all deposits as an insurance premium. If the government raises the levy to one per cent, it will get a total of Bt76 billion annually, based on the country’s total deposits of Bt7.6 trillion.
In the end, the DPA tax will be passed on to depositors and borrowers due to the widening of the interest rate spread as banks and other financial institutions comply with the planned legislation.
The central bank will also be asked to send its profits from international reserve management to help settle the legacy debt, but the prospects are dim.
The central bank’s latest balance sheet shows that its total assets and total liabilities were Bt3.76 trillion and Bt4.2 trillion, respectively, resulting in a negative net-worth of Bt431 billion.
In other words, the government may use only DPA taxes at this stage by diverting up to Bt76 billion in annual funds to pay for Bt45 billion in interest, while the rest could be used to settle the remainder of the principal debt.
If this eventually happens, the purpose of the DPA, set up in 2008 to partially guarantee deposits at banks and other financial institutions following the 1997 crisis, will also be challenged.
When the DPA came into effect recently, the full amount of each deposit in Thailand was covered. Starting August 11, 2011, the coverage however dropped to Bt50 million per depositor per bank.
And from August 11, 2012, onwards, the protection will be further reduced to only Bt1 million per depositor per bank.
