Thailand's cronies ancient history now:
Thai financial sector laws move in
opposite direction from Wall Street

The law prohibiting bank lending to friends, family, and close associates (related-party lending) is one good example (Read article).

Another example is the new condominium law that requires one standard contract for everyone to protect buyers (Read article).

Where these laws came from is anyone's guess. Many were railroaded through at the last moment without enough time for consideration, analysis, or debate (Read article).

Many of the laws may have originated in the collective wisdom of Thailand's permanent bureaucracy, laws held back by the big money vested interests that come along with democratically elected governments.

Complicated financial instruments such as Credit Default Swaps (CDSs) are at the heart of the current global financial crisis (Watch Sixty Minutes in the US last weekend).

Such "financial engineering" has created a complicated and tangled financial mess that no one can fully understand enough to place a value on or pull apart to salvage, work that has yet to even begin (Watch George Soros interview on PBS).

These complicated financial instruments were a big step away from the simpler long-term relationship between bank and borrower of the past:

A decade ago, the transfer and pricing of credit was straightforward. The typical credit relationship was between an individual or corporate manager and the lending officer of a bank, and the typical credit instrument was a loan. Lawyers for the parties looked to standardized loan documentation in their negotiations, and the interaction of borrowers and lenders determined material terms, such as covenants, amortization schedules, and interest rates. Individuals, small businesses, and large public corporations used credit instruments that were virtually identical in form and substance (Source: The Promises and Perils of Credit Derivatives)

"Thai-style croneyism" in Iceland?

With tiny Iceland's economy on the edge of collapse, a prominent economist likened Iceland's policymakers to "Thai-style croneyism":

Professor Thorvaldur Gylfason of Reykjavik University has been predicting disaster for years - on his desk sit wooden blind and deaf monkeys, representing central bank policymakers - and has been shunned for his efforts. "We have Thai-style croneyism that has failed the system," he says. "The Government is not on top of the situation. It is in denial and has not been truthful about the system" (Source: London Times, 09-10-08, link also read his Vox EU op-ed piece)

Many readers of the story immediately thought he meant Thaksin or the leaders of the 2006 coup but what he actually must have meant were the "cronies" behind the 1997 financial crisis ten years ago, people like Rakesh Saxena (See photo on the right).

Iceland is facing a massive devaluation of its currency just like Thailand ten years ago. The baht fell from around 25 to the dollar to over 50 to the dollar at one point.

Many households in Iceland have home loans that are in Euros not in the local Icelandic currency. Iceland never joined the European Union. After the local currency devalues people will have to pay a lot more every month for their homes. Defaults on home loans are likely.

The carry trade, borrowing one currency that charges a low interest rate like the British Pound and purchasing a different currency with a high interest rate like the Icelandic Krona to make money, is the piece of sophisticated financial engineering that maybe seemed too good to be true...and in fact wasn't in the long-run.

Vocabulary:

Rakesh Saxena - an Indian financier and trader in the little-known derivatives marketplace. As of June 2008, he is still engaged in a lengthy fight to avoid extradition to Thailand from Canada; he is accused of embezzlement in 1994-1995. He is widely reputed to have been engaged in dozens of high risk ventures and deals throughout the world over the previous three decades (See Wikipedia)

plummet - falls quickly by a large amount

pride itself on - feeling satisfied when it does something good

defunct - does not exist now, used to to exist

related-party lending - when a bank lends to people who are family or close friends of a bank executive or owner

railroaded through - push through, force through

collective wisdom - using all their experience and knowledge to make sensible and good decisions

permanent bureaucracy - officials who work for the government their whole lives, civil servants (often better able to get things done than elected officials who serve only a short time) ข้าราชการประจำ

vested interests - have a strong personal reason for making decicions based on your money, power, or reputation  ผลตอบแทน ผลประโยชน์ที่ได้รับ

financial instruments - stocks, bonds, securities, derivatives, and other similar things (in general: cash, evidence of an ownership interest in an entity, or a contractual right to receive, or deliver, cash or another financial instrument) (See Wikipedia)  กลไกทางการเงิน

Credit Default Swaps (CDSs) - a derivative that is essentially insurance against the possibility that a borrower will fail to pay back a loan (See Wikipedia) การโอนหนี้เสีย

place a value on - decide the value of something decide how much something is worth (how much would people be willing to pay for it?)  เก็งราคา 

salvage - manage to save parts of something that has been badly damaged (for example, from a sunken ship) การกู้ภัย (เช่น การกู้ซากเรือ)

standardized loan documentation - everyone has to provide the same information to get a loan (friends don't get special treatment) ยื่นเอกสารประกอบการขอกู้

croneyism - giving powerful friends (cronies) special treatment 

shunned - people avoid him, don't talk to or asssociate with him หลบเลี่ยง

on top of the situation - in control ควบคุมสถานการณ์

devaluation of its currency - the currency falls in value and is worth less (for example, Thai baht falls from 32 to 37 to the dollar, note that "falls in value" actually means an increase in the dollar exchange rate) ลดค่าเงินบาท

the carry trade, the currency carry trade - borrow one currency that charges a low interest rate and purchase a different currency that offers a high interest rate to make money off the difference, most carry traders buy the currencies of developing countries, such as Brazil, New Zealand, and Iceland, because they offer higher interest rates (See Forex Blog and presentation)  

Posted by Jon Fernquest at 02:44 PM | Permalink | Comments (0)