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On Monday, the US House of Representatives shocked the financial markets when it voted down the US$700-billion (Bt23.8-trillion) rescue package. The Senate came up with a more compromising version before passing it on Wednesday. Today, the House of Representatives will pick up the bill again and will likely pass it.

The $700-billion rescue package is like a drop of water in a bucket. But it is a good start to fix the wreckage, with thousands of financial institutions reeling under financial stress. With the failure of financial institutions in both the US and Europe, we are likely to see global reserves return to their home countries. This will have far-reaching implications on global-currency adjustments. The most important question is whether the dollar will continue to serve as the world's reserve currency.

At present, foreign creditors are holding about $16.5 trillion in US assets. They invested in these assets because they had faith in the financial system and in the dollar. Of this $16.5 trillion, $2.708 trillion is held in US treasuries, $1.65 trillion in agencies, $2.86 trillion in corporate bonds, $2.425 trillion in equities, $2.6 trillion in foreign direct investment and $4.26 trillion in other assets.

Foreign creditors are holding about 60 per cent of the US treasuries, issued to finance the deficit. Since the US is running a current account deficit of 5 per cent a year, it needs foreign money to help finance the gap, which shows that the US has been living beyond its means. Overall, the foreign governments - not foreign private sectors - are financing the US deficit. If they don't have confidence in the United States' handling of the financial system, they will not hesitate to move their money back home or invest elsewhere. The dollar will then face catastrophic consequences.

Most of the foreign reserves now lie in Asia, chiefly China and Japan. Thailand now has reserves worth about $102 billion. Of this, more than $50 billion repre?sents foreign debt, of which $25 billion accounts for short-term debt that is due within a year.

In Thailand's short-term debt, $11.5 billion represents trade finance, $4 billion loans among the subsidiaries of companies operating in Thailand, and $9.5 billion on short-term borrowing. In the worst case scenario, if all the short-term debts were to flow out of Thailand, the Bank of Thailand would still have net reserves of almost $80 billion. In this respect, Thailand is pretty safe from a currency crisis, though it might face a credit crunch as a result of the global financial distress.

In a way, the US crisis is similar to the 1997 Thai crisis. Before that, Thailand maintained a fixed currency system and for three decades, it was enjoying steady and strong economic growth. Foreign investors and creditors moved their funds into Thailand to capitalise on the interest rate differentials and attractive returns. They believed that Thai authorities would not alter the fixed currency system, which pegged the baht at Bt25 to the US dollar. Local firms and banks also borrowed heavily in US dollar until Thailand's foreign debt ballooned to $120 billion against reserves of $39 billion during the period leading to the financial crisis.

The over-investment led to a bubble economy, which popped in 1997 and you know the rest.

Now, the US is going through the same thing. With the dollar serving as the world's reserve currency, the US has never had any financial discipline because it believed it could borrow money at any time by issuing treasuries. It has been running twin deficits for decades until the national debt climbed to $10 trillion. However, foreign creditors are willing to finance the US debt because they have faith in the dollar as the reserve currency.

Like the Thai fixed-currency system before 1997, the dollar's status as a world currency induced foreign investment. Then the US got into an over-consumption mode, which manifested in the housing bubble. The Federal Reserve under Alan Greenspan also kept interest rates low to boost consumption and economic growth. The financial markets went wild, with institutions speculating on mortgage-backed securities and related papers. You could see bubbles on top of bubbles.

Now, the bubbles have burst. Since the United States only has debts in the US dollar, it is not suffering from a classic currency crisis like Thailand. But it will have a long way to go to fix its financial system. If it does not fix it well, the dollar might suffer to the extent that we'll see a drastic change in the global financial landscape.