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Document Type

Case Study

Abstract

After the floatation of the baht on July 2, 1997, the Thai economy endured a financial crisis from massive currency devaluation, exchange rate losses, and non-performing loans (NPLs). In response, the Thai government employed two types of restructuring programs: (1) the alleviation of NPLs and distressed assets, (2) the correction of financial institution insolvency and capital inadequacy. To help recapitalize private institutions with public funds, the government introduced tier-1 and tier-2 capital support facilities. The tier-1 facility aimed to attract private capital, and the tier-2 facility aimed to stimulate lending and corporate debt restructuring. Capital injections took the form of voluntary securities exchanges: the Ministry of Finance (MOF) exchanged government bonds for preferred shares (tier-1 capital) or subordinated debt (tier-2 capital). MOF was authorized to issue up to B300 billion in government bonds to pay for the tier-1 (B200 billion) and tier-2 (B100 billion) facilities. To cover the government’s financing costs, authorities set interest and dividend rates on financial institutions’ securities above the coupon rates of government bonds. As conditions for receiving the government’s investment in the tier-1 facility, the government reserved the right to replace participating banks’ management and required the banks to first write off bad debts, potentially imposing steep losses on existing shareholders. With uptake around 24.6% of the available total, the program was largely unused. The Thai government amended the program in 1999 and counted the preferred-share portion of hybrid securities as part of match-able tier-1 capital.

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