No to creative flood recovery financing

Central bank rejects idea of swapping safe US T Bills for govt bonds in foreign exchange reserves. Better govt borrows locally at low long-term rates.

Photo of Bank of Thailand Governor Prasarn Trairatvorakul showing off commemorative 100-baht banknotes to celebrate the birthday of His Majesty the King on Dec 5.

For more related central bank stories this week, see: Dealing with the lingering 1997 bailout debt: #1 and #2. 

Click button to listen to Flood Financing to download

BoT rejects bond swap, US T-bills 'enjoy higher standing' by Parista Yuthamanop

The Bank of Thailand dismissed the suggestion of investing foreign reserves by swapping them for government bonds to finance a flood prevention system.

Prasarn Trairatvorakul, the central bank governor, yesterday ruled out Thai government bonds as a better investment option than US Treasury bills for foreign reserve management.

"An argument against our policy is that US Treasury bills offer a low yield of just 1.9% to 2% for a 10-year term. But the T-bill's credit standing is different from that of the Thai government bonds in the market," he said.

One of the best options for the government to raise funds for financing this project would be through borrowing from the local market, as yields for bonds with long-term maturities have declined, he said. 

"Yields for 10-year government bonds are now slightly higher than 3.44%. The cost is lower than for US-dollar-denominated loans, which are now at 4.3% for the same maturity. There is ample liquidity," Dr Prasarn said. 

The low yield and depreciating trend of the dollar have become a concern among central bankers worldwide as they are forced to conduct most of their international trade and [hold their] investment assets in that currency. 

Economist Virabongsa Ramangkura, who serves as chairman of the Strategic Committee for Reconstruction and Future Development set up by the government, said earlier that the proposal to swap government bonds would offer a viable alternative for the central bank's official reserve management. 

Dr Prasarn said the official reserves were adequately high to cope with the government's purchases of dollars from the market to finance imports. 

"The government's domestic borrowing would in turn reduce the central bank's burden to issue bonds to absorb liquidity from the market and reduce pressure on our balance sheet," he said. 

Dr Prasarn said commercial banks' interest-free deposits with the central bank stood at 2 trillion baht, underlining that market liquidity is high. 

"Law prevents the Bank of Thailand from injecting baht into the system except in cases of monetary policy. But the central bank is currently absorbing liquidity from the market, not giving it out," he said.

Official reserves stood at $181.8 billion on Nov 11, unchanged from end of October. At the end of last year they stood at $172 billion. He added that the central bank reduced its intervention in the market as appreciation pressure on the baht subsided. 

Teerana Bhongmakapat, dean of Chulalongkorn University's economics faculty, said the government should finance the investment with the budget or issue bonds to the market to ensure fiscal discipline.

"The government should avoid similar problems happening in some debt-laden European economies," he said.

This happens when the central bank gets involved in public investment financing and blurs fiscal liability from government spending, undermining the central bank's ability to conduct monetary policy.

(Source: Bangkok Post, BoT rejects bond swap, US T-bills 'enjoy higher standing', 19/11/2011, Parista Yuthamanop, link) 

Economics, Finance and Banking Vocabulary

central bank - the main government bank in a country that controls the supply of money and credit in the economy and provides financial services to the government and other banks (See Wikipedia)
central bank governor - the head of the central bank
Bank of Thailand governor - same as "central bank governnor"

banknote - paper money ธนบัตร, แบงค์, ใบ, ฉบับ,  บัตรที่ออกใช้เป็นเงินตรา ซึ่งใช้ชำระหนี้ได้ตามกฎหมายโดยไม่จำกัดจำนวน
commemorative banknotes - paper money printed and issued for some special event or occasion (here: His Majesty the King's upcoming birthday)

interest - payments made for the use of another's money for a period of time
intervention - becoming involved in a situation and trying to change it; getting involved in an activity you are not normally involved in การแทรกแซง
foreign exchange intervention - when the central bank buys and sells in foreign currency markets to influence the baht exchange rate
appreciation - when a country's currency becomes more valuable compared to the currencies of other countries (which makes goods exported from the country more expensive)

monetary policy - the different ways in which a government or central bank controls the supply of money and credit in an economy, Thailand uses inflation targeting (See Wikipedia)
money supply - the total amount of money that exists in the economy at one time, includes cash and some bank deposits (See Wikipedia)

BoT - the Bank of Thailand, Thailand's central bank (See Wikipedia and website)
swap - changing one thing for another thing; give one thing and get another thing in return
BoT rejects bond swap - Bank of Thailand says no to changing (safe US T Bills for less safe Thai government bonds)
dismissed - considered something to be unimportant or not good enough to be taken seriously แย้งกลับ โต้กลับ refused to accept that something might be true or important ปฏิเสธ
dismissed the suggestion of investing foreign reserves by swapping them for government bonds

inject - put into
injecting baht into the system - increasing Thailand's money supply
Law prevents the Bank of Thailand from injecting baht into the system except in cases of monetary policy

But the central bank is currently absorbing liquidity from the market, not giving it out

the central bank reduced its intervention in the market as appreciation pressure on the baht subsided. 

commercial - for business purposes
commercial bank - a bank that provides services related to money to people and businesses such as banking accounts, loans, money exchange, etc, has branches in many different places (See Wikipedia)
deposit - an amount of money kept at a bank in a bank account
interest - the money that a depositors gets for keeping their money with the bank (a percentage of the amount deposited per year)
interest-free deposits - without interest (the depositor does not get any interest)
commercial banks' interest-free deposits with the central bank
commercial banks' interest-free deposits with the central bank stood at 2 trillion baht

bond - "in finance, a bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest (the coupon) to use and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals(ex semi annual,annual,sometimes monthly). Thus a bond is like a loan: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. ...Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (i.e., they are owners), whereas bondholders have a creditor stake in the company (i.e., they are lenders). Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e., bond with no maturity)" (See Wikipedia)

maturity - the length of the life of an asset; the life of a bond or other security (the period of time that it is active); the length of a bond's existence, the length of time that money is lended for
long-term maturities - bonds with long lives

yield - the profit from investment, the money you make each year by owning the asset
bond yield -
yields for bonds with long-term maturities have declined

US Treasury Bills - US government bonds that have a maturity of one year or less, the lowest risk investment possible (See Wikipedia)
US T-bills - Same as "US Treasury Bills"

standing - reputation, status, popularity (how highly people think of something; how much they like it and look up to it)
enjoy higher standing - look up to and think highly of something
US T-bills 'enjoy higher standing' - US T Bills are considered the most safe risk-free investment (or place to park money)

argument - a reason or reasons why you support or oppose an idea or suggestion เหตุผล
policy - a plan of action to guide decisions and achieve outcomes นโยบาย (See Wikipedia)
term - a period of time
An argument against our policy is that US Treasury bills offer a low yield of just 1.9% to 2% for a 10-year term
the T-bill's credit standing is different from that of the Thai government bonds in the market

rule out - to say that a certain choice or choices will not be made (not possible) 
investment - taking your money and putting it into projects to make a profit or earn interest (buying stock shares, bonds, real estate)
ruled out Thai government bonds as a better investment option than US Treasury bills for foreign reserve management.

finance - to provide money for something; borrow money to pay for something จัดหาเงินทุนให้
prevention - the act of preventing something, or things that people do in order to prevent something
finance a flood prevention system

credit - loans; money that you owe someone (a bill that grows until you pay it off at the end of the month, for example) เครดิต เงินกู้
debt - an amount of money that you owe หนี้

laden - carrying something heavy, or supporting the weight of something heavy บรรทุกสิ่งของหนัก
debt-laden - have borrowed too much money (so that it has become difficult to pay back) 
debt-laden European economies

option - a choice; something that you can choose in a particular situation ทางเลือก
better investment option 
best options

currency - a widely used the money accepted for exchange of goods in an economy เงินตรา (See Wikipedia)

X denominated in Y - the value of asset X is measured in currency Y
US-dollar-denominated loans - loans in dollars, borrowing dollars (instead the local currency, here: Thai baht)

local - in this country (here: Thailand)
borrowing from the local market - borrowing money in Thailand (from Thai banks or with Thai bonds (not from foreign banks)

foreign reserves - the amount of foreign currency or gold held by a national bank, which is used for dealing with the national banks of other countries เงินสำรอง
reserves - Same as "foreign reserves"
reserve - something currently not being used but that can be used when needed สำรองไว้
foreign reserve management - the central bank buys and sells baht, gold and other currencies (foreign reserves) to influence the baht to dollar exchange rate 
funds - money needed or available to spend on something เงินทุน
raise funds - finance project; find people to invest in your project (or to give you money outright = cash grant)
raise funds for financing this project

assets - a thing of value that a person or a company owns, for example: stocks, bonds, real estate, loans to others, or money ทรัพย์สิน
liability - debts; an amount that the company or government owes (debt, money that must be paid back in the future)
balance sheet - a written report showing the financial state of a company at a point in time, listing all the company's assets and all liabilities (money owed) (See Wikipedia)

fiscal - related to government spending and the government budget, i.e., public money เกี่ยวกับงบประมาณ

fiscal liability - money that the government borrowed to pay for government spending (that must be paid back in the future)
blurs X from Y - eliminates the difference between X and Y (so that X and Y seem to be the same, but they are actually different)
blurs fiscal liability from government spending - meaning: the government borrows to finance spending, when it borrows it creates debt which is a liability, but if this liability doesn't show up on the government balance sheet (but rather the central bank's balance sheet) you can't see the true state of government finances (non-transparency)

discipline - control; following or obeying rules and standards of behaviour, forcing others to follow these rules and punishing them if they do not (See glossary) ปฏิบัติตามระเบียบข้อบังคับ
fiscal discipline - control in government spending and borrowing

budget - the amounts of money that an organisation has available to spend on different things during a period งบประมาณ (See Wikipedia)
finance investment with the budget - if the government borrows money, then it should show up in the budget (so the public can see what polticians  are doign with the taxes they pay)
ensure - to make certain that something happens or is done รับรอง ให้ความมั่นใจ ให้การยืนยัน
the government should finance the investment with the budget or issue bonds to the market to ensure fiscal discipline.

liquidity - the ability to reduce assets to cash quickly in a market by selling them without losing money (when confidence collapses and everyone is selling this is difficult) สภาพคล่อง; 2. a situation in which an organisation, company, business, etc. has the money it needs to pay its bills; 3. having enough cash (or assets convertable to cash) to continue in business and continue paying off debt and liabilities; 4. the speed that an asset can be turned into cash (cash is 100% liquid, a savings account a little less, a time deposit a lot less); 5. the availability of cash in the economy (through loans) to businesses and consumers (to meet their needs) (See Wikipedia)

ample - enough
ample liquidity - enough liquidity (enough credit and loans in the system to keep the economy running at a good growth rate without high infiation)

underlining - emphasizing, highlighting, stressing, pointing to importance of something
underlining that market liquidity is high

burden - a serious or difficult responsibility that you have to deal with ภาระ a difficult thing that must be done, a heavy load to carry (See glossary)
issue - offering securities (stock shares, bonds) for sale
absorb - to take in a liquid, gas or other substance form the surface or space around ซึมซับ ดูดกลืน
pressure - a force causing change

burden to issue bonds to absorb liquidity from the market and reduce pressure on our balance sheet

depreciate - when the value of a currency falls compared to other currencies (so the country's exports become cheaper, imports more expensive)
depreciating - when a currency is losing its value and becoming cheaper (exports getting cheaper) การลดลงของค่าเงิน
trend - a gradual change or development that produces a particular result ทิศทาง แนวโน้ม
depreciating trend of the dollar - over time the dollar in decreasing in value compared to other currencies

concern - a worry ความกังวล
a concern among central bankers worldwide

conduct - to do something in an organised way; to carry out
international - ระหว่างประเทศ between countries
trade - the buying and selling of goods การค้าขาย
conduct international trade - do international trade (buy and sell things to companies or governments in other countries)

proposal - a plan or suggestion for a group to consider ข้อเสนอ

viable - able to work as intended or able to succeed ซึ่งใช้การได้ (แผนการ, คำแนะนำ) ซึ่งประสบผลสำเร็จได้
alternative - another choice ตัวเลือก / ทางเลือก
viable alternative - a choice or decision that will lead to success (successful outcome, not to failure)

they are forced to conduct most of their international trade and [hold their] investment assets in that currency

official - approved by the government or some authority ที่เป็นทางการ
the proposal to swap government bonds would offer a viable alternative for the central bank's official reserve management. 

cope - to deal successfully with a difficult situation or problem รับมือกับ (See glossary)
the official reserves were adequately high to cope with the government's purchases of dollars from the market to finance imports. 

domestic - within the country ภายในประเทศ
domestic borrowing

dean - a senior official at a college or university, often the head of a faculty or department คณบดี (ทางการศึกษา)
faculty - a group of departments in a college which specialize in a particular subject or group of subjects คณะ
dean of Chulalongkorn University's economics faculty

public investment - investments made by the government
public investment financing - finding or raising the money to make government investments (such as airports or subway lines) 
when the central bank gets involved in public investment financing  

undermine - make weak
undermine the ability to do ... - make unable to do, make weak

undermining the central bank's ability to conduct monetary policy