Unhappy countries: Greece 2012 and Thailand 1997

A financial crisis is like an unhappy family – it can occur from any one of a number of different factors. 

Hence, the origins and implications of the Greek debt crisis are very different to Thailand’s “tom yum kung” crisis in July 1997. 

Last month, we saw the largest sovereign debt restructuring in history as Greece’s private-sector creditors had the value of their debts reduced by well over US$100 billion. Why didn’t Thailand do the same thing back in 1997?

The Greek crisis started because the government had too much debt. A long recession and government budget shortfalls mean that debt levels continue to worsen – Greece’s ratio of public debt to GDP was 129 per cent in 2009, 145 per cent in 2010, and is still rising. It is now widely accepted that these levels are not sustainable, and that current holders of Greek bonds cannot get back the full value of their holdings. 

Meanwhile, the Thai government actually had very low levels of debt back in 1997. There had been consistent budget surpluses throughout the early 1990s, and the ratio of public debt to GDP as of June 1997 was just 4 per cent. 

In Thailand, public debt did not cause the crisis – rather, the crisis caused public debt. The government chose to rescue the financial sector, incurring Bt1.4 trillion in liabilities (about 30 per cent of GDP) at the Financial Institutions Development Fund (FIDF). And the government had to arrange a $17-billion loan facility from the International Monetary Fund (IMF), after the central bank used up all of its foreign reserves in a failed defence of the baht’s fixed exchange rate. 

Thailand’s recovery from the 1997 crisis was later helped by surging exports, as the baht’s massive depreciation made local corporates more competitive. Could the same thing apply for Greece if it leaves the euro zone and the euro? 

That may be difficult. Unlike Thailand, Greece does not have the industrial base or agricultural sector to drive a big export-led recovery – the service sector makes up nearly 80 per cent of its economy. 

Also, Greece gets many benefits from being part of the European currency union. Leaving the euro would trigger huge outflows from Greece, as both local and foreign investors would be reluctant to hold a new Greek currency. This could further worsen the economic downturn. Furthermore, having a new currency would make it even more difficult for the Greek government to raise funds, or apply for a bailout. 

In Thailand after the crisis, the IMF became unpopular as its impositions were deemed too harsh. Greece is getting some of its bail-out money from the IMF, but mostly from richer neighbours in the euro zone. Is that a better situation? 

Not really! The austerity measures that have been imposed on Greece in the past few years have been drastic – much more so than what happened in Thailand. 

International creditors are not big believers in Keynesian economics, or in the need for fiscal stimulus. Greece’s public sector wages have been cut and bonuses abolished. Income taxes and VAT have been increased. Government spending on healthcare and education are being reduced. 

Greece has been in recession for more than four years, and it will probably remain in recession for a few more. In contrast, Thailand’s recession lasted less than three years. 

Can this kind of crisis happen here in Thailand in the future? 

Greece’s latest austerity measures and restructuring are aimed at bringing public debt down to 120 per cent of GDP by 2020. Even this target is viewed as too optimistic by some sceptics. 

Despite the past crisis (most of the FIDF debt remains) and the 2008-9 recession, Thailand’s public debt of 41 per cent of GDP remains at a very reasonable level. While there are some aggressive proposals for a special budget on flood management projects, it is unlikely that Thai public debt will get anywhere near the 60 per cent limit anytime soon. 

Hence a Thai debt crisis is very unlikely. But in the world of finance, the next major crisis will probably arise from something else entirely.