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CLEANING UP THAILAND'S MESS: THE LONG STRUGGLE AHEADEarly results are impressive, but the makeover will take years to completeUntil this year, Wisit Wisitsora-at had been waging a noble but thankless crusade. For more than a decade, Thailand's Justice Ministry had sought to overhaul the country's weak bankruptcy code to make it easier for creditors to extract payment from deadbeat corporate borrowers. Wisit, a former judge, was assigned to persuade skeptical Cabinet members and legislators to act. But since many lawmakers were also wealthy landowners who benefited from easy credit, few felt a sense of urgency. Now, Wisit has all the support he needs. In the wake of a financial collapse that has buried thousands of Thai corporations in debt, the government of Prime Minister Chuan Leekpai is trying to push through sweeping bankruptcy reforms by yearend. Says Wisit: ''Bankruptcy has never really been an issue in Thailand until now.'' Nor, for that matter, have such issues ever been high on the agenda of the World Bank, the International Monetary Fund, or the Asian Development Bank. But now, these agencies realize that the global order faces a major threat: massive, rapid flows of private capital that few emerging nations are capable of managing. Few developing nations have the sophisticated central banks, securities-industry oversight, and legal systems needed to cope with hot money--and clean up the mess when booms go bust. So in January, the World Bank decided to help Thailand, Indonesia, and South Korea--all of which received IMF bailouts--modernize their financial and legal institutions. With a budget of nearly $60 million, the World Bank's new office for special financial operations now has a SWAT team of 24 staffers coordinating technical assistance on everything from drafting new commercial laws to devising training programs for bank supervisors. ''These are very complicated, long-term commitments,'' says Jonathan L. Fiechter, who heads the Washington-based unit. ''These governments did not want people to fly in for a few weeks, give cookbook advice, and then fly out.'' As the first Asian bailout recipient last year, Thailand has become the testing ground for this effort. This spring, some 150 consultants were on the ground, from McKinsey & Co. restructuring experts to central bankers from Japan, Germany, and Britain. The early results are impressive: While other Asian governments dawdle, Thailand already has shut down 68 failed financial institutions and sold off most of their $23 billion in loans at steep discounts to foreign investors. Authorities also have taken over weak banks or forced mergers on them, and are preparing to auction billions in bad loans. Thailand's securities regulators are more aggressively punishing insider trading and misuse of corporate funds. While this is significant progress, the makeover of Thailand Inc. will still take years, if not generations, to achieve. Meanwhile, the effort is doing nothing to solve the country's immediate crisis: a devastating dearth of capital. Thailand's banking system is so paralyzed that even manufacturers with firm export orders can't get trade financing. And the once-booming stock market is deathly silent. With the economy expected to contract 20% over the next two years--and foreign banks and portfolio managers now avoiding emerging markets--capital isn't likely to flood back soon. To many local businesspeople, Washington's new obsession with modernizing institutions is like offering to install a high-tech sprinkler system after the barn has already burned down. ''We need money to find a way out of these problems, not just bankruptcy courses,'' says Sarasin Viraphol, an executive vice-president for Thailand's giant Charoen Pokphand Group. Still, Thai officials agree that the reforms are overdue. The first step will be fixing the Bank of Thailand. An inquiry into the central bank's oversight has found that examiners often couldn't verify the amount of bad loans or the quality of risk management at Thai institutions. If examiners knew of problems, the job of disciplining banks went to a separate policy department that was subject to political interference. The new system will combine the central bank's oversight operations into one office. The bank is also setting up a school staffed by foreign instructors to train more than 200 examiners in such areas as credit analysis, monitoring foreign-exchange transactions, and assessing bank management. NO CAPITAL. Fixing Thailand's dysfunctional bankruptcy system, which favors the owners of companies, is another goal. Now, a borrower can tie up a case in court for as long as a decade. As a result, hundreds of Thai companies are stiffing creditors despite having assets to sell. One reason: Thailand lacks a procedure similar to America's Chapter 11, where debts of salvageable companies are frozen while they undergo court-supervised workouts. Instead, a company must liquidate and its owners get wiped out. ''People are afraid of bankruptcy,'' says Wisit. ''We need to destigmatize it.'' The new laws, bankruptcy court, and training institutes aim to address these problems. But politics remain an obstacle. Thailand's Senate watered down legislation in April that gave more rights to creditors, and getting a new law passed by Oct. 31 as planned will be difficult. There are also doubts about how well the system can adapt to the rule of law when disputes have traditionally been settled informally. ''Changing the laws doesn't mean attitudes will change overnight,'' says Kitipong Urapeepatanapong, who heads U.S. law firm Baker & McKenzie's Bangkok office. The bigger question is whether adopting the trappings of a Western financial system will convince investors that it is now safe to risk their money in Thailand. Consider the nation's stock exchange. Since last year's meltdown, the Securities & Exchange Commission has delisted dozens of companies and begun to prosecute rogue traders. A computerized trading system can quickly detect irregularities. But foreign interest is so dead that most Western brokerages have shut their research offices. Daily trading volumes of $25 million, vs. nearly $4 billion in 1993, are common. New issues are rare. ''There is no capital market for Thailand,'' says Vallobh Vimolvanich, vice-chairman of TelecomAsia Corp., a high-flying stock of the early '90s. ''Why would investors come?'' The lack of foreign interest poses a risk for Thai reformers: How do they know their efforts to upgrade financial institutions will satisfy investors as much as the IMF? ''Everyone agrees the reforms are needed for the long run,'' says Amaret Sila-on, who heads the agency charged with reforming the financial system. ''But what level do we have to reach for investors to feel comfortable? Hong Kong's level? Japan's? America's? We don't know.'' Thailand can only hope that whenever Westerners catch emerging-market fever again, the country will be better prepared to handle the mayhem.
By Pete Engardio in Bangkok RELATED ITEMS
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Updated Oct. 1, 1998 by bwwebmaster
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