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Moody's Investors Service has been fast to pick on Thailand. Earlier, it pointed out that the Thai economic downturn is going to be one of the worst in the region. Then it downgraded the credit outlook of Thailand from positive to negative. Now, Moody's announces that it has placed the debt and deposit ratings of 11 banks in Thailand on review for possible downgrade due to the deteriorating fiscal position of the Thai government. The banks affected are Bangkok Bank, Bank of Ayudhya, the Export-Import Bank of Thailand, the Government Housing Bank, Kasikornbank, Krung Thai Bank, Siam City Bank, Siam Commercial Bank, Standard Chartered Bank Thailand, TMB Bank and United Overseas Bank Thailand.

"The review of their debt and deposit ratings will look at the extent to which Thailand's ability to provide support to its banking system, if needed, is converging with the government's own debt capacity as a result of the ongoing global economic and credit crisis," says Karolyn Seet, a Moody's assistant vice president and analyst.

"Moody's believes that most governments are at least as likely, if not more likely, to support their banking systems as they are to service their own debt - a view that has traditionally led to bank ratings often benefiting from significant uplift due to systemic support," says Seet. "However, as the financial crisis continues, the capacity of a country and its central bank to support its banks converges with, and is increasingly constrained by, the government's own debt capacity."

While Moody's is fast to revise Thailand's credit rating, it has failed to revise the ratings of the countries or institutions with which it appears to have a cosy relationship. A week before the collapse of Lehman Brothers in September 2008, Moody's did not raise any alarms on the US investment bank. Moody's and other credit rating agencies have performed poorly during the financial crisis, failing to foresee or to give proper warnings to investors about the health of economies and financial institutions. Critics from this part of the world have been blaming the international credit rating agencies for being part of the cronyism of global capitalism.

In the UK and United States, the financial bail-outs have grown to eye-watering proportions in just a matter of months. Yet Moody's has been reluctant to assign new ratings for the debt and credit worthiness of these two countries and their financial institutions. As it currently stands, the commitments and guarantees of the US and the UK governments are equivalent to almost 90 per cent of GDP. Last year the US provided US$12 trillion (Bt412trillion) in bail-out money to prop up its banking system, compared with $2 trillion for the UK. The US national debt now stands at about $8 trillion compared to the size of its economy of $13-14 trillion.

On May 23, Xinhua reported that China unveiled credit rating standards for the sovereign entities of central governments, the first sovereign credit rating standards in China, aiming for broader participation in global credit rating. The standards were announced by Dagong Global Credit Rating, one of the first domestic rating agencies in China. The sovereign credit rating standards will be able to evaluate the willingness and ability of a central government to repay its commercial financial debts as stipulated in contracts. This story is interesting. It points to China moving ahead to set up its own credit rating system, without having to wait for the international rating service of agencies such as Moody's or Standard & Poor's.

In fact, Thailand's macroeconomic conditions and banking system are in much better shape than most countries in the region in spite of the sharp contraction by 7.1 per cent of the economy in the first quarter of this year. Thai banking assets equal around 90 per cent of GDP. Thailand's government debt is about 40 per cent of the GDP. Thai authorities and bankers have a good memory of the 1997 crisis when the financial system was insolvent and the government eventually spent only 25 per cent of the GDP to bail out the financial system. Since then, bankers and financiers have put in place a more reliable risk management system, with a more prudent banking service.

However, this does not mean that the Thai financial system is not vulnerable to further fragility if the economic downturn and political crisis continues. With the experience of the 1997 crisis, the Thai authorities are not likely to give blanket bail-outs to any failed institutions as the US Federal Reserve and the US Treasury Department are doing now. Weak banks will be allowed to go under this time, though their good and bad assets will be separated for independent management in order to minimise losses.

The US has been faced by 18 months of economic contraction, but it has yet to kick-start the bank bail-out package in a credible manner.

We believe that Moody's should sharpen its pencil when it comes to re-rating the financial systems in Europe or the US, which are in far worse shape than those in Asia. If it fails to do its job properly, as it is doing now, its service will become obsolete.