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The Thai-tanic: Responding to the Asian Financial Crisis of 1997

Asian countries took a financial hit in 1997, resulting in a crisis that reverberated throughout the world. It began on July 2, when the central Bank of Thailand allowed the baht to float against the U.S. dollar for the first time in 14 years. The baht plunged between 15-20 percent in overseas currencies. The collapse of the baht resulted in a huge loss of foreign exchange reserves and plunged the country into financial panic. The “Thai-tanic” rippled throughout the rest of Asia, the Americas and Europe.

Although there had been signs of an impending slump, few policy makers expected the magnitude of the devastation that would follow. Crony banking, reliance on foreign savings, heavy borrowing and risky lending practices fueled the economic spike that preceded the fall of the baht. The devaluation presented political challenges for U.S. diplomats in Thailand, who had to respond to pleas for aid from an important long-time ally.

Marie Therese Huhtala, interviewed by Charles Stuart Kennedy in October 2015, described the impact the Asian financial crisis had on bilateral relations with Thailand. William P. Kiehl, also interviewed by Kennedy in September 2003, talked about the media outrage that followed the fall of the currency.

Please follow the links to read more about Thailand, economics or an account of Japan’s economic crisis
of the same era.


“Rich people were selling their furs and their Mercedes at rock bottom prices”

Marie Therese Huhtala, Director, Bureau of  East Asia and Pacific, 1996-1998

In July 1997 the Thai currency, the baht, fell dramatically. The baht had been heavily overpriced and was a tempting target for international hedge funds. Its sudden fall caused serious problems for Thailand and triggered a massive East Asian financial collapse…. (Huhtala is seen at left.)

It hit in Thailand first. The fall of the baht was the catalyst that prompted the whole thing. As I say, this had been predicted. Our embassy knew that the baht was unsound and would probably fall pretty soon. What was not predicted was the fact that it spread through the whole region and how quickly it spread.

For the first few months of the crisis, the summer and fall of ‘97, the U.S. attempted to deal with this through the World Bank and the IMF (International Monetary Fund). The approach was to let the financial institutions proceed as they normally would, and the IMF offered some loans, but with very stiff conditionality attached to them.

In Thailand meanwhile, the baht continued to sink like a stone. The United States wasn’t providing any direct financial assistance even though Thailand was a treaty ally, a country that we’d been friends with for 40 years. The only thing we did directly was to arrange some bridge financing through the Board of International Settlements, BIS, to help them get through to their first tranche of IMF lending. Our direct assistance was very small…

[The U.S. loan guarantee for Mexico] kind of raised expectations because the Mexican economy crashed in, I want to say, 1993, ‘94, something like that….The U.S. assisted Mexico at that time. This is directly relevant because we came in with a major financial contribution.

Congress didn’t like that so they enacted a law that said we could not make a direct financial contribution to a country whose economy was crashing unless Congress approved it. This in fact was one of the reasons we didn’t move more directly to help Thailand in the fall of ‘97.

We had this Congressional restriction which was due to expire at the end of that fiscal year, on September 30, 1997. The Thais didn’t understand that very well; they only saw that we’d come to the aid of Mexico but now we were not coming to their aid.

Other countries, notably China and Japan, did provide direct financial assistance; I believe China gave them a billion dollars. Of course Japan was affected subsequently, and South Korea was hit very hard by this crisis. The U.S. was seen as way too slow off the mark.

So by the end of the year, the Thai baht, which had been trading at 25 to the dollar before the crash, hit 56 to the dollar. People’s livelihoods were wiped out. Students in American universities suddenly had their tuition effectively doubled and had to withdraw in the middle of the year.

People in Thailand, ordinary people, had to pull their kids out of school. Executives lost their jobs; rich people were selling their furs and their Mercedes at rock bottom prices. It was a drastic hit to the economy there.

I will never forget that fall. I’m no economist, but I kept trying to get the Economic Bureau involved and get the folks at NSC [the National Security Council] looking at this. This was a major crisis hitting our friend and ally at the same time as they had a new government in place trying to go further down the road of democracy. This was not a good equation.

“We were seen as deserting a friend”

I remember, (it was) the week before Christmas. Finally, a cable came out from the Undersecretary for Economic Affairs through the EB (Bureau of Economic and Business Affairs) tasking all the embassies in the region for analysis. It read something like, “We’ve just come to the realization that there is a serious financial crisis going on in Asia. We want your analysis. How did it happen? What steps should be taken?” This struck me as ridiculous. It was the third week of December, the crisis was six months old, and the due date for this long report was December 24th. Unbelievable.

The embassy in Thailand, which had been frantically reporting for months and months, sent in a one-line response referring the Department to its major reporting and analysis cables. It cited all of its reports through the fall, perhaps ten excellent cables that they had sent in.

But fortunately, the exercise caught the attention of Stu Eizenstadt (seen left), the Undersecretary for Economic Affairs. It was good that people of his caliber, including his counterparts in Treasury who were very senior, had finally focused on what was happening in Thailand.

By January 1998 the President had realized that that were political stakes here too, that we were seen as deserting a friend. He invited Thai Prime Minister Chuan Leekpai for an official visit in March. Mr. Eizenstadt led a big interagency effort to put together an assistance package for Thailand that would show them that we are still their friend and we really did care.

The package included things like loan guarantees and OPEC contributions and keeping the Peace Corps in Thailand. There was not a whole lot of direct financial contribution but there was one really interesting part of it.

Thailand had signed on to buy a squadron of F-18 aircraft for their Navy. Of course these are very expensive pieces of hardware and now they wanted out of the deal. We’d never allowed a country to back out of a deal after they’d signed the letter of offer and committed to buy it through FMS [foreign military sales]. But Thailand could not afford, financially or politically, to go forward; they needed to get out of this. I believe it was around a $25 million dollar commitment.

It had not been a great idea in the first place for them to buy these aircraft; they probably didn’t have an operational need for them, but there was something of an arms race always going on in Southeast Asia and their Navy wanted this sexy new plane. When they’d signed the contract, several years before, their economy was going strong, and it didn’t look like it would be a problem. Now it was….

Eventually a deal was brokered. It took the involvement of the White House to lean on the Pentagon and it took a lot of Congressional work as well because Congress had been notified of the sale so Congress had to approve of the change. And again, no country had been let off the hook before on a purchase of this kind. But it was finally accomplished. This was the major “deliverable” for the Prime Minister’s visit to Washington in March of ‘98…

[As for the cause of the crash,] there was crony banking, definitely. The big banks were owned by the same Sino-Thai families as the big corporations. The baht had been pegged to the dollar for too long of a time. The U.S. dollar was weakening during the ‘90s and the baht had been pegged at 25 to the dollar for at least ten years. That had gotten out of sync; it wasn’t realistic.

There were huge amounts of dollar-denominated lending within Thailand; if there was a sudden switch to baht the loans would be unaffordable. There was a lot of money going around the planet in night time trades on the global market. And investors like George Soros were involved in the currency speculation….

He (George Soros, seen right) was considered to be (a major villain) primarily by Prime Minister Mahathir of Malaysia who was very, very bitter against the English and the U.S. He was also biased against the Jews, and since George Soros is Jewish he claimed that the financial crisis was no accident; [Mahathir alleged] it was an out-and-out deliberate attempt on the part of the West to manipulate those economies and bring them down because we didn’t like seeing Asian countries succeeds. Which is nonsense, but that kind of stuff was being said in Thailand as well and people were believing it.

Also the IMF conditionality was too harsh for this situation. The IMF had developed its approach in dealing with bankrupt countries in Africa and other places and they always imposed recommendations on the amount of fiscal deficit a country could carry. They were quite unrealistic in the case of Thailand trying to recover from this crisis.

As time went on the IMF modified its conditions maybe three or four times as they learned that their model was not applicable and that it was not working. This process built up huge resentment among Thai elites against the IMF as well as against the United States. The Thais were very happy when they were finally able to pay off all their IMF loans and they don’t want to ever go there again (which is unfortunate).

So the IMF itself lost a lot of credibility and prestige. I believe this also happened in South Korea and other places affected by this crisis. It was a very painful period….

There were a lot of other things going on at the same time. That was I think one of the problems with the crisis; it was hard to make this issue heard in the babble of all the other things that were happening.

For instance we were having huge political problems in Cambodia at the time. We were in the process of normalizing relations with Vietnam and negotiating a trade agreement. I know there were a lot of things going on in our relations with China. When the South Korean economy began to crumple, I think this was seen as a more of an immediate problem in the region because it was a bigger economy and had bigger trade with the United States. Southeast Asia, it took a while for it to really register on people’s minds….

“In the view of the Thai media, the United States had allowed this to happen”

William P. Kiehl, Bangkok Thailand Public Affairs Officer 1995-1998

The relationship between Thailand and the U.S. was on a really high plane until July when the baht imploded. Now, we knew that Thailand was doing a lot of things in their economy that were somewhat shortsighted, but I don’t think there was any accurate prediction on the part of the embassy as to what would happen with the run on the baht… (Kiehl is at left.)

The run began on the baht, but then it soon escalated to other currencies. That alone would not have caused the Asian financial crisis, but the banking system and the crony capitalism of Thailand and Indonesia and South Korea and Japan and Taiwan – all were shaken because of this, and a cascading series of effects ensued. But it all began with the Thai baht. The Thai-tanic, as they used to call it, or “baht-ulism” – any of those puns.

Nobody in the economic section suspected that things were going to come out the way they did. Oh, sure, they would say, “You know, the banking system is over-extended on loans here – this bank seems shaky,” et cetera, but they didn’t put it together in the big picture…. They didn’t look at it in an Asian context. They were looking at it in a Thai context, and it didn’t appear to be earth-shattering, the way it was.

It soon did become my problem, however, because almost immediately after the crash, all the blame on this came onto George Soros and the U.S. government, and the United States as a global economic power. Somehow, in the view of the Thai media, the United States had allowed this kind of thing to happen.

You see this relationship. Immediately, the younger brother said, “Look, we accepted your guidance, now you have to protect us! And protecting us doesn’t mean just keeping the Commies out of Southeast Asia, it means protecting our economy – protecting us.” So the U.S. came in for quite a lot of criticism, some of it reasonably valid and some of it, of course, extreme …

[George Soros was involved] in currency speculation. Well, he did a run on the British pound, as well. He made fortunes in currency speculation, arbitrage, and made, I take it, a formidable amount of money on the fall of the baht.

Well, that’s his business, you know. Is he responsible for the economic collapse of Asia? I don’t think so, but one could debate that, and they surely did in a rather one-sided way in the Thai press.

Things were not great, but they really got worse when the implosion also hit Indonesia, and then the United States announced it would give a bail out to Indonesia. It didn’t give a bail-out to Thailand, it gave a bail-out to Indonesia, and the Thais said, “Hey – we have this security agreement with the United States, we’re a treaty ally. We’ve done everything America wants. We’re a functioning democracy with a free press, all the things that America loves. Indonesia is a dictatorship, with no free press, a corrupt government, and no security relationship with the United States. These people rarely listen to America. After all, they are Muslims. The United States bails them out, and doesn’t bail us out? Betrayal!”

And the relationship shatters…. So it became very much a public relations and public diplomacy issue, as well as an economic issue.

Well, there was a tremendous amount of hand-wringing in the embassy, I can tell you, because everyone was immediately aware of the bad press we were getting….The news articles were somewhat slanted to show the U.S. in a bad light, but the editorial comments were really quite vicious, as though the U.S. was really just spitting in Thailand’s face….I would give this litany of what was going on in the media, and there was many a sad face around the table, the ambassador included, and people were getting quite anxious about it, as I was.

Not only that, but they were hearing, from all of their contacts. The political section was hearing from their friends at the foreign ministry, “We feel terrible about this. Why are you doing this to us? What have we done to deserve this kind of treatment? Why are you treating the Indonesians and the South Koreans better than you are us?”

The economic folks were hearing it from the bankers and from the finance ministry and from the business interests. The Amcham, the American chamber of commerce members, were saying, “This is going to hurt business. People are eventually going to stop buying American goods and we notice our relationship with our Thai business partners is deteriorating. They’re really angry about this.” And the military guys were saying, “There’s a lot of discontent, here.” All this was building up….

Not only were there the faces around the Country Team meeting when I was telling them what was actually being printed in the newspapers, about America, but they were also hearing it from their friends and colleagues and contacts in the various segments of Thai society. So there was quite a lot of hand wringing, a kind of a Leninist, “What is to be done?” How do we solve this problem? This is a problem – what do we do about it.

I talked to a number of my Thai staff and some of the American staff, who were there long enough to understand what Thailand was about, and following a couple of these conversations, I sat down and I wrote a memo to the ambassador, proposing a public affairs plan on how to deal with this…

First of all, that this was important, that we had to address these issues directly and answer the charges that were being made about the United States, because in Thailand, if you are accused of something, and you remain silent, you are guilty. You have to answer charges.

The presumption among most diplomats is, “Oh, we won’t dignify that charge with a reply.” That’s the worst thing you can do in Thailand. You have to reply. You have to kick them back in the teeth just as hard as you were kicked otherwise it appears that you’re guilty. This strikes a lot of people as unusual, but, in fact, there it’s quite the correct thing to do.

The second thing was, I don’t remember if I used the exact phrase in the memo, but I think I wrote something like, “If you don’t have the steak, then you can’t have the sizzle.” In other words, you can’t put a good face on policy if you don’t have one, and we didn’t have one. Quite clearly, we didn’t have a policy. There was no American economic policy to deal with this. It was purely ad hoc….

We did have a feel for what was going on in Washington, but the feeling we got was that, quite frankly, Washington wasn’t paying any attention. Again, that is not something that is completely new to the Foreign Service. The U.S. Treasury Department communicated with the Thai Ministry of Finance almost exclusively by telephone and fax without even going through the embassy, so that the embassy only found out what the U.S. Treasury Department was saying from the Thai Ministry of Finance.

The Thai would be kind enough to share this information with the financial attaché of the econ section. He was a State officer; he wasn’t a treasury officer. He called himself the financial attaché; he was the number two in the econ section. His beat was the banks, and so they would clue him in, and that’s how we knew what Treasury was up to, or what they were saying to the Thai.

It was really quite a very unsatisfactory circumstance, and it was unsatisfactory from my perspective because I knew I couldn’t pin a public diplomacy campaign on nothing, but it was really disturbing to my colleagues in the econ section who felt that they were just being run over, and weren’t in the loop at all, and the ambassador was miffed, very miffed, in fact, because he felt that he, as the president’s representative, ought to be in on what was going on with the Thai, and, of course, he should have been.

So we took a two-track policy here. On the first side, the ambassador and the econ section and the political section, principally, tried to convince Washington that this was important from a policy perspective. They needed to have a policy, and they needed to get people out there, high-level officials, to talk directly with the Thai and have the ambassador and his team be part of the discussions, and not do everything by telephone and fax. And they embarked on that, in a big way.

Now, th

at also served my interest, because I said, “OK, once we get a policy then we can promote that policy, but we have to initially start and just talk to people and say that it’s not the way you portray it, really. We’re not the bad people. (We need) to get that out there and get the conversation going with people, and then, hopefully, fill in the blanks.” I thought it was very important to get high-level visitors there, because that would provide us the publicity and the platform in order to get the word out to people.

The second parts of the public affairs program, aside from the high-level visits, were regular contacts, and that meant the ambassador. It also meant the DCM (Deputy Chief of Mission) and I and our media section and the econ folks, and we were very lucky, in a sense, because we had a DCM (Deputy Chief of Mission) at the time who spoke really fluent Thai…

On the English-language press, the ambassador and I were the main interlocutors, but we also always brought in people from the economic section, because they understood this in a way that made it seem as though they were the high priests of finance, and so they had authority because they understood the terminology better than, frankly, the ambassador, the DCM, myself or the assistant information officer.
So we did a whole series of lunches. Not a week went by when at least one of these lunches didn’t take place. Now, in addition to those lunches, the press attaché, the assistant information officer, our senior Thai FSNs, and I were cultivating the media, as well.

We were having drinks with them, and chatting with them, and having one-on-one lunches with them, to get the point across that, first of all, George Soros did not cause this. He took advantage of a weak situation in Thailand and in Indonesia and in other countries, and we tried to explain to them how this kind of thing can happen, and it could happen, in fact, and did happen to the British pound, and George Soros made a bundle on that. He made over a billion dollars by manipulating the British pound just a year or two prior to that.

So it wasn’t an American financier taking advantage of the poor, Asian, struggling democracies. It was business, cold-hearted business, and they took advantage of a perceived weakness.

In the meantime, the ambassador and his policy team were finally making some headway. We were reporting all this back to Washington, all this vitriol, all these damning statements and I delighted in making sure that the language of the Thai press was inserted in all of these cables, because it was just unbelievable. I mean, “Oh, our friends the Thai, good guys. They’re our little brothers, you might say.”

It was that kind of relationship, it was a very paternalistic view of the Thai, because we had helped them out in times past and they were good, loyal allies and they were fun people. “Fun” is something in Thailand that is very important.

People always smile in “The Land of Smiles.” This is part of the mythology that Americans perceive of Thailand and the Thai that they are kind of uni-dimensional, grinning and friendly, and so on. Well, they saw another side of that, and it was shocking to people in Washington.

That coincided with the fact that this was becoming a serious financial problem, which could, heaven forefend, affect the Japanese. The Japanese were the ones who had the really big bucks, and they also were very heavily invested in U.S. Treasuries, and if the Japanese had to bail out their banks, they would have to pull all this money out of U.S. Treasuries, and that would hurt the U.S. economy very much.

Already it was hurting the U.S. economy because our exports were drying up in East Asia, because they didn’t have the scratch to pay for them. So all these things were coming together, and I don’t say it was the U.S. embassy in Bangkok that twisted the tail of the monkey in Washington and made policy happen, but it was, obviously, another factor.