And the Baht Tumbles

In the case of the Thai central bank—the Bank of Thailand—on July 2, 1997, the bank decided to abandon the Baht’s fixed peg to the Dollar (it was actually not a precise peg, but a so-called trading band, or limited range of rates) and let it float on international currency markets. As expected—though not perhaps by the central bank—the Baht collapsed. Over the next few weeks, in an ill-advised and ultimately futile attempt to bolster the Baht, the Thai central bank spent some US$60 billion (US$23 billion of that borrowed) before throwing in the towel.

After that, the Baht was on its own. And what it did was sink like a stone from about THB20 to US$1 to THB50 to US$1. Those with U.S. Dollar loans thus saw their debts more than double in a very short period of time. When global investors—banks, institutions, money funds, and individuals—saw what was going on in Thailand, which was that the vast majority of companies had Dollar-denominated debts greater than their assets, and the Thai banks and so-called finance companies that had extended those loans were going to be in deep trouble, they did just what global investors always do during a time of crisis: They pulled all their money out before they lost any more of it.