With the flow of free equipment from the Pentagon drying up. Thailand's armed forces have turned to an unconventional source of military funds: from U.S. and European private banks.
In the past two years. Thailand quietly has raised about $160 million in defense loans, a knowledgeable Thai source said. Among the purchases the loans have financed are Northrop F-5E jet fighter - bombers, Scorpion-class light tanks and patrol boats.
Currently two more loans for a total of $82 million are being packaged by Morgan Guaranty Trust Co. of New York and Grindlay Brandts Asia, a merchant banking arm of Britain's Grindley Bank (owned 49 percent by Citibank of New York).
"The Thais are not traditionally an aggressive people," said one banker familiar with defense lending. "We therefore feel it is a legitimate desire that they be able to buy armaments to defend themselves. . . . Where countries are know to be belligerent, we would back off from them."
A few banks feel the loans raise serious practical and ethical questions, related primarily to potential repayment problems, public relations, and whether it is proper for a bank to involve itself in military affairs.
Chase Manhattan Bank and Bank of America both maintain worldwide policies against direct financing of military gear, bank spokesmen said.Many Japanese banks do, too.
Others, like Bankers Trust Co. of New York, are willing to finance nonlethal military equipment, but draw the line at weaponry. Bankers Trust last year financed a number of air-sea rescue launches for the Thai armed forces, a bank spokesman said.
Banks that have confirmed their participation in defense loans to Thailand, or are known by other bankers to have taken part, include Manufacturers Hanover Trust Co. of New York, Deutsche Bank of West Germany, Citibank, Bankers Trust, Grindlay Brandts Asia and Morgan Guaranty.
Bank officers here noted that Citibank does not normally engage in defense lending, but it made a special exception for Thailand when it contributed $5 million to a loan managed by Deutsche Bank.
Assuming the two pending loans are finalized, Thailand's total military borbowing will stand at about $242 million in two years, or about $120 million per year.
Thailand-now governed by a military administration-plans to spend about $950 million of its own money for defense in the fiscal year beginning Oct. l, according to press reports of budget deliberations.
The decision to borrow military funds dates to the collapse of the prowestern governments in neighboring Indochina in 1975. In the months that followed, Thailand's close military relationship with Washington was downgraded as the U.S. disengaged from the Southeast Asian peninsula.
Between 1951 and 1977, Thailand's armed forces received grants from the U.S. of
.l84 billion, plus large numbers of concessionary - rate government loans, according to the U.S. Embassy. (For the current year, grants come to only $3 million and loans to $29.5 million.)
Against this background the Thais began a search for a new source of foreign money. The result was the Defense Loan Act of 1976, which authorized borrowing of up to
billion from both foreign and domestic banks.
The loans are not classified secret, but both sides normally agree on signing that there will be no publicity at all.
Thus bankers generally decline to discuss them on the record, but from private conversations it is possible to piece together a picture of how the loans are negotiated and administered.
So, far about half a dozen have been signed, some of them single-bank loans, some of them syndications in which a group of banks provides the funds, sharing both the risk and the interest income. Signed by the Thai Finance Ministry, the loans carry the guaranty of the Thai government.
In March, Deutsche Bank and some 10 other banks signed for a $50 million syndication. Deutsche Bank at first had been asked to arrange a general-purpose loan. Only as the negotiations neared completion was the bank informed that the funds would be used for procurement by the Defense Ministry, a source said.
Nonetheless, the loan went ahead. Deutsche Bank experienced some difficulty in lining up syndicate members despite Thailand's generally high credit rating among the world's private banks. The reason was that some banks were wary of military lending.
One banker who turned down an offer of participation said he was told the loan's legal documentation would contain no mention of military purchases.
In the end, about 10 banks joined the syndicate, including some from the U.S., Europe and one unnamed bank. At no point was the syndicate informed of precisely what it was paying for, a source said.
The loan's terms were repayment over seven years, with the interest rate 1 1/8 over the floating rate at which banks obtain funds on the London interbank money market.
Coming up is a $50 million defense syndication managed by Morgan Guaranty. David Band, vice president and general manager of Morgan's branch in Singapore, declined to comment about that specific loan except to say that "in a number of countries we have made such loans, and it's on a case-by-case basis. It's not something we rule out."
Grindlay Brandts Asia, meanwhile, has put together a $32 million syndication be used for general procurement by the Thai Defense Ministry.
Bankers who engage in defense lending generally argue that Thailand has a right to defend itself, that it has a relatively low external debt, and that there is no reason to consider defense loans as different from general-purpose development loans or loans advanced to correct balance of payments deficits.
Thailand so far has signed for $160 million in development loans. It has taken no balance of payments loans.
Like defense loans, loans of these two types normally are unsecured, proponents point out. The only guaranty of repayment is a government promise. And the lenders often do not know precisely how their money is used.
A few bankers advance the argument that the loans generate repayment funds (which as a rule of thumb bankers like), but do it indirectly. Military equipment helps make a country secure, and security means economic prosperity and the ability to repay, they say.
Many bankers feel that making general-purpose loans but refusing to make militry ones is hypocritical. They say that many developing countries routinely use some of the funds obtained through general-purpose borrowing for military purchases.
Thailand cannot do this, however, because the government never has given itself authority to take general-purpose loans. Rather, it has two laws-one for development loans, one for defense-and it must tell the lender under which law it is taking the funds.
Furthermore, there can be subtle pressure from the Thais. "We've been asked by the Thais to do it," said one executive whose bank has done business with the country for many years. "We would find it very difficult to say no."
Finally, some bankers feel that with the international banking system awash with excess funds, banks are willing to put their money into loans that they normally would shy away from.