3. Financial crisis resolution in Thailand
This section provides evidence that measures taken to resolve Thailand’s financial crisis of
1997 were successful and provide a solid basis for more ambitious reforms thereafter.
The crisis starting with a heavy devaluation of the Thai Baht in July 1997 turned into a fully
fledged financial crisis within a few months. The exchange rate and the stock market collapsed,
most financial institutions were closed, virtually all financial institutions had to be recapitalized,
it came to a credit crunch and the economy shrank by almost 10% in 1998 (e.g.Warr, 1999). The
core of immediate measures taken aimed at keeping the financial sector existent: first, the state
stabilized the sector by guarantying most deposits and thus the existence of banks. This
emergency measure was the basis for the later plan to work out the cumulating non-performing
loans (NPL) with the help of bad-debt resolution mechanisms (so-called asset management
corporation) and a recapitalization of financial institutions. Fig. 2 shows the result of these
measures, i.e. the return of the ratio of NPLs to an almost conventional level to about 10% at the
end of 2001 and less thereafter.