On June 27, 1997, the finance ministry of Thailand, along with the Bank of Thailand, that nation's central bank, announced that activities of sixteen financial and securities firms were to be suspended for thirty days, and directed the troubled firms to find merger partners. Five days later a further and dramatic step was taken: Finance Minister Tanong Bhidaya declared that the Thai central bank would no longer support the baht, the Thai currency, at its fixed exchange rate of 24.45 bahts to the dollar.
The initial reaction of international financial observers was positive. On July 10, the respected Far Eastern Economic Review reported these developments under the headline "Free at Last," with a subtitle reporting that "Thailand floats the baht, begins financial-sector clean-up" (Vatikiotis, 1997a, 70). According to the article, "now that the currency is afloat, confidence is indeed on the rise," that the baht would reflect Thailand's actual economic situation; and a senior executive at a Thai bank was quoted as saying "finally we have decisive action" (Vatikiotis, 1997a, 71). No one doubted that Thailand had substantial economic problems. Early in June, another article in the Far Eastern Economic Review had discussed Thailand's economic difficulties (Let this be a lesson, 1997, 73). Cheap foreign capital in the form of low-interest, short-term loans had flooded the country in the mid-1990s, even as its export sector weakened. Yet actual productive uses for this capital were lacking; in 1990, the return on equity for non-financial shares in the Thai stock market was 26.6 percent; by 1996 the return on equity had dropped to 7.7 percent. Thus, much of the new capital flooding in went into asset inflation -- particularly of real estate. Developers and property speculators overvalued their holdings, then used these inflated values to borrow yet more money at low interest rates.
Nevertheless, the prevailing view in midsum...