NY Times story today re. Russian liquidity:
By MICHAEL WINES
OSCOW -- Stock and bond prices plunged Thursday, jarring Russian hopes that the
government could avert a depletion of its finances and a meltdown of the banking
system.
Capping a week of ominous declines, the major blue-chip index dropped as much as 15 percent
Thursday morning before the Federal Securities Commission stepped in and halted trading. The
market later recouped all but 6.49 percent of the loss, but the blue chips now have lost almost a
quarter of their value in seven days.
Demand for Russian bonds seemed to vanish altogether, as yields on some short-term bonds
exceeded an astounding 300 percent, assuming anyone wanted to purchase them. Few did.
"The market has ceased to exist, in some ways, as an actual market," said Tom Adshead, a director
of research for United Financial Group in Moscow.
But Russia has seen other terrifying plunges in this decade, and experts differed over whether this
one would be fatal, or just one more near miss.
The government said the panic was psychological, not fiscal, and repeated, as it has in recent
days, that it has money to meet its obligations through the fall.
The Central Bank and aides to President Boris Yeltsin dismissed a suggestion Thursday by
financier George Soros that the ruble should be devalued, -- a move that would effectively reduce
the nation's debt but inflate prices.
"All the rumors that such documents are being worked out here are just invention and lies," said
Irina Yasina, the spokeswoman for the Central Bank.
Prominent amid the furious denials, however, was a more equivocal statement by Finance Minister
Oleg Vyugin. Vyugin said Soros actually urged several measures to support the ruble, one of
which was devaluation.
"Devaluation is an idea that should be considered only in a package," he said. "Soros did not call
for devaluation as such."
But many private analysts nevertheless predict just that, saying that the government is losing the
struggle against bankruptcy, and that its most likely escapes would be devaluation or a "forced
restructuring" of its debt, in which bondholders would simply be handed new repayment
schedules with no choice but to accept them.
Either course would amount to a dramatic repudiation of the $22.6 billion rescue plan that the
International Monetary Fund, the World Bank and Western leaders assembled only last month.
That package, for which Russia promised more coherent and efficient tax and budget policies, was
supposed to yank the government back from near-insolvency.
The failure of the package to give the Russian economy its much needed stability has
disappointed Washington. The White House spokesman, Mike McCurry, said, "It is critical that
the Russian government act quickly to restore confidence in their economy, and that is something
we have communicated with Russian officials."
The concern in Washington was reflected at meetings that President Clinton had with his
economic and national security advisers on Tuesday and Wednesday, and in conference calls
that Treasury Secretary Robert Rubin and Deputy Treasury Secretary Lawrence Summers both
had with Russian officials.
Washington has also conferred with deputy ministers from the Group of Seven major industrial
nations to review the options, McCurry said, but no specific proposals were made for further aid
for Russia. Politically, any proposal to increase aid for Russia would be hugely unpopular in
Congress.
The IMF package was also supposed to cushion private investors and the Russian people from
hardship, a goal that now seems more and more remote. Despite redoubled tax-collection efforts
and sweeping financial decrees from the Yeltsin government, foreign investors so far have shown
little faith that Russia is climbing out of its financial hole. With fewer foreign investors, the ruble
has lost value and the government has had to raise interest rates on bonds higher and higher to
attract buyers.
But those developments have sapped the government's financial health, further eroding
confidence and leading still more investors to call it quits.
Moody's, the bond-rating service, lowered its rating of Russia's foreign bonds from B1 to B2,
which is five levels below investment grade, and said the outlook is negative.
What can the government do to pull out of the tailspin beyond devaluation, default or some other
dramatic and painful act? There are no simple answers.
Thursday's calamity had many causes.
The prime focus Thursday was on a Central Bank announcement made Wednesday evening of
new rules to increase bank liquidity and to protect the ruble. One increased the number of banks
with direct access to Central Bank credit; a second limited purchases of dollars by certain
unnamed Russian banks in an attempt to prevent currency speculation.
The rules, which were issued without explanation, underscored what had long been rumored: that
some Russian banks are in trouble and that others have already walked away from debts to
foreigners and to other Russian banks. Many banks here have borrowed heavily to invest in
government bonds, only to see the value of those investments plummet as rates for newer bonds
began to skyrocket.
The second trigger may have been pulled Thursday morning, when The Financial Times in
London printed a letter from Soros urging an international rescue of the ruble. That effort should
include a ruble devaluation of 15 percent to 25 percent, Soros suggested. The call for devaluation
made headlines worldwide, and may have galvanized wary investors with holdings in Russian
companies that would be hurt by a drop in the ruble's value.
Sure enough, the value of the ruble plunged Thursday, and the government seemed to confirm the
ruble's plight, saying the reserves of hard currency and gold it can use to prop up its currency had
dropped by $1.4 billion over the last two weeks, to $17 billion.
The Central Bank's action and Soros' letter came atop other developments that have made
Western investors nervous: the declining price of oil, a staple of the Russian economy; the
economic crisis in Japan; and a government admission that tax collections, while rising, are falling
short of stated goals.
Matters were not helped when, on Wednesday, the lower house of parliament seemed to reject
Yeltsin's call for a special session to enact emergency laws on taxes and the budget. Yeltsin has
implemented many of those laws by decree during the parliament's recess, but the legality of some
of those decrees is in doubt.
While everyone agrees that the nation's fiscal situation is grim, the view that the plunge in stock
and bond prices is justified by events is hardly unanimous.
A number of experts note that the government is moving steadily if not always quickly toward
fulfilling the terms of the loans offered last month by the IMF and other lenders. And in fact the
government's finances are stable, if hardly robust.
The real crunch may come this winter, when a large amount of debt falls due. The government
must sell new bonds to repay some of the old ones, and it is the dead market for new Russian
bonds that has led many investors to conclude that the government will not be able to raise the
money it needs.
"People are afraid the debt situation is not manageable when in fact, by all accounts, it is and will
be manageable, at least up to November," said Margot Jacobs, a banking analyst at the United
Financial Group in Moscow. "But instead of playing wait-and-see, people seem to be voting with
their feet." |
