This preview shows page 1. Sign up to view the full content.
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
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-...
View Full Document
- Fall '13