We believe our focus on corporate debt in thailand is

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Unformatted text preview: preferential access to credit using a detailed dataset on Thai firms prior to the crisis period. We believe our focus on corporate debt in Thailand is especially appropriate for the study of cronyism in lending practices. Thailand was the first casualty of the crisis, experiencing the first wave of serious speculative attacks on it’s currency in July of 1997 followed by a sharp decline in it’s stock market, after which South Korea, Malaysia, Indonesia and the Philippines were affected. Attempts to reconstruct the circumstances leading up to the crisis (such as Corsetti et al. (1998a), Corsetti et al. (1998b), Pomerleano (1998)) argue this was not surprising as Thailand was the country with the shakiest macro-economic fundamentals toward the end of 1996. Among the manifestations of weakness were large external deficits, increasing short-term foreign indebtedness and the fragile conditions of banks due to an accumulation of bad loans. This last feature is of particular interest in the context of this study because the accumulation of bad loans prior to the crisis has been mainly attributed to moral hazard arising from bail-out guarantees that were implicitly provided by the government to banks. Corsetti et al. (1998b) describe an example which makes this clear and is worth reproducing. Although most of the evidence is anecdotal, the analysis of a few cases can shed light on more general behavioral patterns. The best known is the case of Finance One. Few months before it’s collapse, ING Bank of Thailand had approved a loan to the company as part of a USD $160 million syndication led by the World Bank’s International Finance Corporation. According to ING sources, concerns about the viability of Finance One were simply dismissed by the Bank of Thailand, which 1 made explicit reference to a promise of bail-out in case the company had financial problems1 . By the late summer of 1997 however, the Bank of Thailand found such bail-out promises unsustainable and eventually 56 finance companies went bankrupt and were forced to close. Discussions of cronyism in finance in the wake of the Asian financial crisis suggest that banks often extend preferential finance to projects of dubious quality promoted by their friends or relatives because banks (or bankers) obtain private benefits from such projects if they succeed and do not lose if the projects fail since they expect to be bailed out by the government in such circumstances. This implicit guarantee by the government weakens bank incentives to monitor and liquidate poor quality projects. Weak incentives on the part of the bank filter down to the level of the firm, and the firm in turn often does not have incentives to exert high levels of effort and avoid project failure because it expects to be re-financed by the bank on account of it’s close ties. The government would, of course, ideally like to avoid this ‘soft-budget constraint’ situation by monitoring banks more strictly, which in turn would cause them to monitor firms more closely and prevent long-...
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