The former finance minister is heading a committee to rehabilitate Thai industry and infrastructure in the aftermath of the worst floods in 50 years. To reconstruct the economy, the government needs money. But, due to all the populist spending pledges, it is broke. Virabongsa's task is to help the government find the money - at least Bt350 billion for the time being.
The easy target is the Bank of Thailand, to which the government could pass on the burden of an old debt so that it can create a new debt for fresh spending.
The government needs a personality of Virabongsa's stature to battle against the central bank, whose governor, Dr Prasarn Trairatvorakul, is drawing up a strong defensive line. The battle now looks ugly, centring on the debt of the Financial Institution Development Fund (FIDF), an arm of the central bank.
The ghost of the FIDF will not be laid to rest easily. Every time a new government steps in, it wants to find a way not to service the debt of the FIDF, which used taxpayers' money to bail out the financial institutions in the 1997 Asian financial crisis to the tune of Bt1.4 trillion. The FIDF debt now stands at about Bt1.1 trillion.
The Yingluck government does not want to service the annual interest payment of Bt45 billion for the FIDF. It wants the central bank to assume all the Bt1.1 trillion of FIDF debt so that it has room to create new debt.
Thailand's public debt has exceeded Bt4 trillion, equivalent to 40 per cent of the gross domestic product. If the FIDF debt of Bt1.1 trillion is deducted from the overall public debt, the governmentwould be in a position to create new debt for massive spending. The government, prior to the floods, leaked a "New Thailand Project", through which it plans to invest Bt900 billion in the economy.
The Pheu Thai politicians live up to their repurtation as big-time spenders.
If my memory is correct, Dr Virabongsa used to oppose any attempt to pass the FIDF debt to the central bank, arguing that doing so would compromise the financial and monetary discipline of the country. He appears to have gone through a change of heart. He would like the central bank to dig into its foreign exchange reserves of more than US$180 billion to pay off the FIDF debt.
Governor Prasarn is protecting the central bank's turf. The FIDF debt was incurred by the previous government (led by General Chavalit Yongchaiyudh), which offered a 100 per cent blanket guarantee of the public deposits and creditors while the banks and finance companies were failing. No government in the world has hitherto issued a Cabinet resolution to protect creditors' rights like the Thai government, which did so under the directive of the International Monetary Fund.
Since it is the policy of the government to protect the public deposits and the foreign creditors' money, it must keep its promise. In this regard, Prasarn is correct to have insisted that the government continue to pay the debt of the FIDF.
The BOT's foreign exchange reserves are not totally secure. Foreign investors could withdraw their money out of the country any time in the event of financial shocks. If they were to flee the country (by converting the baht for the dollar before taking the money out) like they did in 1997, Thailand could lose its reserves in a hurry.
The position of Thirachai Phuvanat-naranubala, the finance minister, on the FIDF debt is not clear. Initially he wants the BOT to study a plan to help the government reduce the debt of the FIDF. He realises that the central bank is losing money from its monetary operations, resulting in a negative net worth of more than Bt400 billion. He wants the BOT to share the burden, but he opposes an outright monetisation of the FIDF debt, which would destroy the credibility of the central bank. By the way, Thirachai used to serve as BOT deputy governor.
If the BOT were to totally monetise the Bt1.1 trillion FIDF debt, it would increase its negative net worth to Bt1.5 trillion. In this case, confidence in the baht would wobble. That is the road Zimbabwe has taken.
Today, Kittiratt Na Ranong, the deputy prime minister, will call a meeting to set a plan for the Finance Ministry and the BOT to work out the FIDF debt. The details remain shrouded in mystery. But politically speaking, the Yingluck government has already sent an unequivocal message that the BOT must take the whole burden of the FIDF debt.