Thai Government Scraps Plan to Transfer Debt to Central Bank

January 03, 2012, 11:33 AM EST

By Suttinee Yuvejwattana and Daniel Ten Kate

(Adds finance minister?s comments in second paragraph)

Dec. 30 (Bloomberg) -- Thailand?s government scrapped a proposal to transfer $35 billion of legacy debt from bank bailouts to the central bank, and will find other ways to alleviate the burden on the government?s finances.

?Transferring debts to the Bank of Thailand will be like printing money,? Finance Minister Thirachai Phuvanatnaranubala told reporters today. ?The methods we are using must not affect fiscal and monetary discipline and must not hurt confidence among foreign investors and international agencies.?

The decision came after a meeting today with Bank of Thailand Governor Prasarn Trairatvorakul. Deputy Prime Minister Kittiratt Na-Ranong said yesterday the step would save the government as much as 65 billion baht ($2 billion) in annual interest costs that could be used to fund anti-flood measures.

The proposal increased concerns that Prime Minister Yingluck Shinawatra?s administration was infringing on the central bank?s independence, after Kittiratt in October said the BOT should lower interest rates to help businesses cope with the country?s worst flooding since 1942. Thirachai had opposed the measure, warning earlier this week it could hurt investor confidence and stoke inflation.

The baht gained 0.4 percent to 31.64 as of 1:48 p.m. in Bangkok. Yesterday it fell the most in two months to the weakest level since Aug. 16, 2010, according to data compiled by Bloomberg.

Deposit Protection

The government may take 0.39 percent of the 0.4 percent fee that commercial banks pay to the Deposit Protection Agency to pay interest on the debt, Thirachai said, adding that it would amount to about 30 billion baht per year. The government also plans to amend the law to allow the Financial Institutions Development Fund to collect fees from commercial banks, which would amount to a further 20 billion baht, he said.

?This will remove the interest burden from the government,? he said. ?If the central bank records a profit, they can also use that to reduce the debt.?

The Financial Institutions Development Fund racked up a 1.4 trillion baht debt during the 1997 Asian financial crisis on loans aimed at rescuing struggling lenders. The government closed more than 60 non-bank financial companies and seized half of the nation?s 14 commercial banks that received help from the fund.

Under a repayment agreement in 2002, the finance ministry makes interest payments while the central bank pays down the principal whenever it earns a yearly profit. The Bank of Thailand has reported annual net income once since 2004 and last year reported a net loss of 117 billion baht, mostly due to losses on foreign exchange.

Since 1997, the principal on the debt has fallen by 300 billion baht, or about 21 billion baht per year. During that time the government has paid as much as 65 billion baht in interest annually, according to Kittiratt, who said yesterday the central bank would report a ?record high profit? for 2011.

--Editor: Tony Jordan

To contact the reporters on this story: Suttinee Yuvejwattana in Bangkok at suttinee1@bloomberg.net; Daniel Ten Kate in Bangkok at dtenkate@bloomberg.net

To contact the editors responsible for this story: Chris Anstey at canstey@bloomberg.net; Peter Hirschberg at phirschberg@bloomberg.net

Source: http://c.moreover.com/click/here.pl?r5694015235

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