Markets virus now a plague
Analysis,
By Peter Hartcher, Asia-Pacific Editor
The virus of financial distress has mutated and continued to spread across world markets during the week, with each outbreak leading to another.
Although the onset of severe crisis in Russia was geographically remote from Asia, it was clearly a victim of the plague unleashed in the Asia crisis, experts said.
"Asia was the factor that pushed Russia over the edge," said the deputy director for the Asia-Pacific office of the International Monetary Fund, Mr David Nellor.
And Russia's disease, in turn, instantly infected a host of other countries, producing new problems in Latin America and Eastern Europe.
"Since Russia defaulted on Monday, the pressure on Russia's peers has been severe," said the chief treasury economist for Bankers Trust in Singapore, Mr Alistair Boyd.
In this way, the forces released by the Asia crisis continue to exert negative pressures elsewhere around the world, leading to a self-reinforcing cycle of deflationary pressures.
And those pressures continue to bear down on currency markets and sharemarkets in Australia and New Zealand.
New Zealand's Treasurer, Mr Bill Birch, said on Friday that the Asia crisis was slowing the NZ economy far more than expected.
He said that the country's Budget surplus was set to shrink to "close to zero" as a result, and may even turn to deficit.
The rapid spread of financial problems from one country to another is a well established phenomenon.
Observing the speed and spread of financial contagion, Baron Carl Meyer von Rothschild noted that "the whole world has become a city". And he wrote that in 1875, long before the term "globalisation" was conceived.
The crisis that he was lamenting started in May, 1873, in Austria and Germany. It is generally agreed to have been the first significant international financial crisis.
It travelled to Italy, Holland and Belgium before crossing the Atlantic Ocean to infect the United States within four months.
From the US, it rebounded on Europe, once again to embroil England, France and Russia.
It is not difficult to understand how a crisis could spread within Europe, where markets, investors and companies were closely interconnected. But how did it cross the Atlantic so quickly?
According to an American student of financial crises, Mr Charles Kindleberger, it made the crossing by rail.
The Germans had been big investors in US railroads, a hot growth industry. But when the German stockmarket collapsed, distressed German investors immediately cut off the supply of capital to the Americans.
What about the crisis of 1997-98? How does it travel?
It came to the Russians down a pipeline.
The Russians depend on oil exports to generate the hard currency needed to pay for their imports and to service foreign debt.
But with the collapse of Asia's economies, demand for oil has slumped. The oil price has fallen by more than 40 per cent since the arrival of the Asian crisis - from an average of $US21 a barrel in the first half of last year to recent lows of under $US12.
The result? Russia has devalued its currency and announced a moratorium on repayment of foreign debt.
"There is a direct link through commodity prices between the Asia crisis and Russia's crisis," said the IMF's Mr Nellor.
And there is a second connection, according to Mr Nellor. "Because of the Asia crisis, the markets have taken another look at emerging markets and the cost of capital for those markets, including Russia, has gone up."
Of course, Russia had long-standing problems of its own making, especially the Government's inability to collect taxes.
"At some point, Russia's problems would have hit. But it could have muddled on for some time," said Mr Nellor. Asia's influence proved decisive in the timing of Russia's crunch.
But now that it has hit Russia, this victim becomes a new transmission point, sending more shockwaves through the international system.
As BT's Mr Boyd points out, one of those shockwaves is the new penalty the markets are imposing on other emerging-market countries in Latin America and Eastern Europe.
Another shock from Russia is that the international banking system will end up with bigger losses. This, in turn, means that the banks' share prices will suffer, exerting a negative influence on the stockmarkets of Frankfurt, New York, and Tokyo.
And credit growth worldwide will suffer because the banks will be obliged to lend less than they otherwise would have.
Yet another consequence of Russia's moratorium, according to the Zurich Group's global economist, Mr David Hale, is that it "could provoke a debate in Asia about whether governments and companies in the region should also pursue some form of debt moratorium in order to obtain new concessions from their creditors".
What would this mean? Potentially greater damage to the international banking system and yet higher risk premiums for poor countries which need to borrow money.
Mr Hale suggests that there is also another implication from Russia's crisis: "It demonstrates that the IMF's ability to provide new aid is limited."
The crunch comes less than six weeks after the IMF arranged a $US22.6 billion ($39 billion) emergency credit line for Russia. It was, evidently, not enough. The IMF has only $US16 billion left and its plan for a new treasure chest of $US46 billion is stalled.
The US had no hesitation in launching missiles on Afghanistan and the Sudan to protect its interests in a security crisis. However, the Congress is refusing to lend, at low risk, top-up capital to protect everyone's interest in responding to an economic crisis.
So the crisis continues to unfold, but the resources to deal with it are running out.
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