Thailand, 1997

Following the Mexican rescue in 1995, the use of the ESF to provide foreign bailouts became less common. When it was used, it was typically as a backup plan in the event that IMF resources were not sufficient to address a country’s financial needs. Its declining use is attributable to several factors. First, congressional restrictions that were imposed limited its use in 1996 and 1997. In the summer of 1995, Senator Alfonse D’Amato led a push in Congress to restrict Treasury’s ability to use "taxpayer dollars” to fund foreign bailouts. D’Amato was successful in his efforts. Both Houses of Congress passed the bill requiring congressional approval for all ESF credits larger than $1 billion and with maturities longer than 60 days unless the president assured Congress in writing that vital US economic interests and the stability of the global financial system were at risk.[1] The law was enacted in August that year. The second factor that contributed to the ESF’s declining use for foreign rescues was a set of reforms the IMF implemented, based on terms agreed to at the G-7 Halifax Summit (discussed in chapter 4). In short, these reforms—most notably the establishment of the emergency financing mechanism (EFM) procedure—were designed to enable the IMF to address its two chronic weaknesses as ILLR: resource insufficiency and unresponsiveness. The EFM would allow the Fund, in extreme circumstances, to respond more swiftly and with more resources when a financial crisis demanded such a response.

The Asian financial crisis was the first true test of the IMF’s new approach to crisis management. Thailand was hit first. In the summer of 1997, Thailand’s currency, the baht, collapsed after investors pulled out and speculators bet against the Thai central bank’s ability to defend its pegged exchange rate. In late July 1997, Thailand had nearly exhausted its supply of foreign exchange reserves in an unsuccessful defense of the baht. The government was forced to approach the IMF for assistance. Less than a month later, the IMF approved a nearly $3 billion standby arrangement for Thailand, though "no one believed that this amount alone would suffice.”[2] Despite the Fund’s new powers embodied in the EFM, its limitations as an ILLR remained apparent. Reports at the time noted that "it appears increasingly likely that Thailand may need a 'bridge loan’ of roughly $1 billion” before the IMF makes the funds available. Initially, the United States indicated it would chip in as it had with Mexico several years earlier. Reports quoted Secretary Rubin saying "the United States is prepared to participate in a short-term, multilateral bridging facility.”[3] Yet, this lip service was not backed up with action. Why did the United States decide against providing bridging resources to Thailand? Several factors appear to have played a role in the decision.

First, from an economic and financial perspective, the risk Thailand posed to the US financial system was moderate. Aggregate financial exposure—including total US bank claims and residents’ holdings of debt securities and equities—was about $13 billion, or one-sixth the US economy’s financial exposure to Mexico three years prior. More important, the Clinton administration believed that the Thai crisis was an isolated event. The perception at the time was that Thailand did not pose an immediate risk to other more systemically important economies in the region. As Laura Tyson, then the chair of the Council for Economic Advisors, explained, "Thailand is a very small economy. It doesn’t have a lot of links and it’s not exactly in your back yard ... . The U. S. chose not to intervene in Thailand, thinking it was not going to spill over. Why would it? The contagion effects were not apparent to anybody.”[4]

Second, Treasury felt the IMF was better prepared to deal with the Thai crisis on its own than it had been when faced with the Mexican crisis two years prior. There was no reason to act unilaterally when the Fund could handle the problem multilaterally. For instance, Lipton noted that "from a financial standpoint [an ESF credit on behalf of Thailand] wasn’t necessary. The IMF was using its lending capacity; at that point they could lend a sufficient multiple of quota to handle the problem.”[5] Third, the proposed ESF contribution to Thailand was reportedly quite small. James Steinberg, then Deputy National Security Advisor in the Clinton administration, explained that while the State Department and the National Security Council (NSC) felt it was symbolically important from a political perspective for the United States to have some "skin in the game”—even if the contribution was not substantial—Treasury "saw little economic value for the small, additional, bilateral piece that was being advocated by some” and that it "wouldn’t make a difference.”[6]

Finally, and perhaps most important, the administration felt constrained by the domestic political climate at the time. As noted above, in the aftermath of Mexico, Congress had imposed temporary restrictions on Treasury’s ability to use ESF resources for foreign credits. When the Thai crisis erupted, those restrictions were still in place (though they were only months away from expiring). The congressional backlash to Mexico had a chilling effect on Treasury’s willingness to tap the ESF on behalf of Bangkok. Steinberg explained that Rubin et al. were in "never again” mode. The fear was that bailing out Thailand would lead to additional congressional restrictions on Treasury’s autonomy over ESF resources. Thus, providing a largely unnecessary rescue in this case "would risk the ability to use the ESF in the future.” President Clinton was persuaded to "preserve the tool.”[7] Despite Rubin’s early insinuation that Treasury would act to support Thailand, in the end the administration balked.[8] As it turned out, the IMF’s contribution was not enough to prevent the crisis from spreading to others in the region.

  • [1] For more on the congressional response to the Mexican bailout, see Henning 1999,pp. 66-70.
  • [2] Boughton 2012, p. 508.
  • [3] Sanger 1997.
  • [4] Commanding Heights 2002.
  • [5] Lipton 2014.
  • [6] Steinberg 2014. Lipton echoed Steinberg saying that the arguments from State andNSC were to essentially "do it [provide a credit to Thailand] for symbolic purposes. Showwe care” (Lipton 2014).
  • [7] Steinberg 2014. Lipton noted similar fears at Treasury that a Thai rescue might "haveeven led to the ESF becoming completely unavailable for the Secretary of the Treasury”(Lipton 2014).
  • [8] In his memoir, President Clinton admitted that in retrospect "not making at least amodest contribution to the Thai package” was a mistake, adding, "Rubin and I didn’t maketoo many policy errors. I believe this was one of them” (Clinton 2004, pp. 806-807).
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