Economia Finanziaria e Monetaria - uniba.it · 2 Economia Finanziaria e Monetaria Giovanni Ferri...

1 Economia Finanziaria e Monetaria Giovanni Ferri Bari, EIMF 2012

Economia Finanziaria e Monetaria

Lezione 12 - Le crisi finanziarie pre-2007: Grande Depressione; Messico 1994; Asia orientale 1997-98; Russia 1998; fallimento LTCM;

depressione giapponese; megafallimenti societari


Scaletta della lezione 12

1.  Grande Depressione; 2.  La crisi scandinava; 3.  Messico 1994; 4.  Asia orientale 1997-98; 5.  Russia 1998; 6.  Fallimento LTCM; 7.  Depressione giapponese; 8.  Megafallimenti societari.

0. Outline


1. Grande Depressione – 1



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marks point at which country left Gold Standard


2. La crisi scandinava – 1

58 Liberalization, Crises and Mega-Corporate Bankruptcies

balance-sheet channel (see section 4.2.1 above). However, the flood of money simply overwhelmed the capacity of financial institutions and regulators to handle it. After 40 years of heavy regulation, the banks and the regulatory institutions did not know how to work on deregulated and highly competitive markets. Specifically, the main deficiencies were in the assessment of the clients, the projects and the collaterals.

Figure 8.1 Sweden stock market indexSource: Thomson Datastream

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Sweden-DS Stock Market (100 at 1 Jan 1986)

Figure 8.2 Sweden real estate indexSource: Thomson Datastream

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Sweden real estate price index (100 at 1 Jan 1986)

9780230_248113_10_cha08.indd 589780230_248113_10_cha08.indd 58 2/11/2010 3:50:49 PM2/11/2010 3:50:49 PM




balance-sheet channel (see section 4.2.1 above). However, the flood of money simply overwhelmed the capacity of financial institutions and regulators to handle it. After 40 years of heavy regulation, the banks and the regulatory institutions did not know how to work on deregulated and highly competitive markets. Specifically, the main deficiencies were in the assessment of the clients, the projects and the collaterals.

Figure 8.1 Sweden stock market indexSource: Thomson Datastream

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50

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Sweden-DS Stock Market (100 at 1 Jan 1986)

Figure 8.2 Sweden real estate indexSource: Thomson Datastream

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Sweden real estate price index (100 at 1 Jan 1986)



2. La crisi scandinava – 3 Recent Financial Crises 59

Therefore the results of some years of deregulation were a specula-tive bubble, high private borrowing and an excessive credit growth (see Figure 8.3).

Financial deregulation also affected the real economy. Consumption grew more than disposable income and the savings ratio collapsed. The rate of unemployment reached unprecedented lows (see Figure 8.4), thanks to the real estate bubble that spurred the demand for domestic goods and services. Moreover, inflation curbed exports, the buoyant

Figure 8.3 Banks’ claims on private sector (1Y percentage change – Sweden)Source: Thomson Datastream

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Figure 8.4 Unemployment 1985–96 (percentage – Sweden)Source: Thomson Datastream

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Recent Financial Crises 59

Therefore the results of some years of deregulation were a specula-tive bubble, high private borrowing and an excessive credit growth (see Figure 8.3).

Financial deregulation also affected the real economy. Consumption grew more than disposable income and the savings ratio collapsed. The rate of unemployment reached unprecedented lows (see Figure 8.4), thanks to the real estate bubble that spurred the demand for domestic goods and services. Moreover, inflation curbed exports, the buoyant

Figure 8.3 Banks’ claims on private sector (1Y percentage change – Sweden)Source: Thomson Datastream

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Figure 8.4 Unemployment 1985–96 (percentage – Sweden)Source: Thomson Datastream

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2. La crisi scandinava – 5 60 Liberalization, Crises and Mega-Corporate Bankruptcies

domestic demand encouraged imports and the current account reached a negative value (see Figure 8.5).

But the economic boom stopped all of a sudden in 1989. In order to curb inflation, the Riksbank (the Swedish central bank) increased its policy interest rate exactly when German reunification pushed up international interest rates (see Figure 8.6). As recounted by Jonung et al. (2008), the real interest-rate increase – from !1 to "5 per cent in just two years – triggered Fisher‘s debt deflation (see section 1.1 above). So assets prices collapsed, financial wealth decreased and the real weight of debt increased (because the nominal value of the debt had not changed). The attempt to reduce the indebtedness by selling the assets made the situa-tion even worse. In fact, during the second half of 1989, the equity and the real estate markets both dropped (see Figures 8.1 and 8.2).

The losses on these two markets jeopardized financial stability. In September 1990, the financial company Nyckeln could not renew its floating liabilities (marknadsbevis) due to its exposure on the real estate market. In just a few days, the marknadsbevis market was drained and the financial companies were forced to resort to the traditional banks they had established links with during the boom. Unfortunately, due to inappropriate credit policies, the banks also had low-quality assets.2

In the autumn of 1991 the liquidity problems turned into solvency problems when two major Swedish banks, the Första Sparbanken and the Nordbanken, had to resort to capital injections in order to meet their minimum requirements. The Swedish government had to underwrite new

Figure 8.5 Current account balance (percentage of GDP – Sweden)Source: Thomson Datastream

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2. La crisi scandinava – 6 Recent Financial Crises 61

shares of the Nordbanken and guarantee the loan issued by the Första Sparbanken. However, these measures did not ease the crisis, which became even more severe in September 1992, following the bankruptcy of the Gota Bank. Hence, the turmoil turned into a systemic crisis and the government had to undertake firm, transparent and resolute actions. Due to the lack of a deposit insurance mechanism, the govern-ment guaranteed the liabilities of all Swedish banks and, between the end of 1992 and the beginning of 1993, nationalized the Nordbanken and the Gota Bank. Moreover companies specialized in credit manage-ment (bad bank) were established to deal with non-performing loans of these two banks. The Bank Support Authority was also established to support the other banks in trouble.

The financial crisis hit the real economy severely as the financial losses triggered the deflationary spiral on consumption (see section 1.1 above). The demand for goods, and durable goods in particular, dropped and in just a few years the real interest rate increased from a negative value to more than 8 per cent. The aggregate demand reduction caused a significant increase in the unemployment rate, from 2 to 8 per cent.

According to second-generation currency crisis models (see Chapter 2), severe domestic recession challenges the sustainability of the fixed exchange rate. On the one hand, the central bank should reduce the interest rate to ease the recession, but on the other hand, it should

Figure 8.6 Policy rate and inflation (Sweden)Source: Thomson Datastream

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2. La crisi scandinava – 7 62 Liberalization, Crises and Mega-Corporate Bankruptcies

increase the interest rate to protect the exchange rate from speculative attacks. In the case of Sweden, the interaction between the real, bank and currency crises was strengthened by the remarkable stock of foreign liabilities accumulated by the private sector in the 1980s.

While Finland abandoned the fixed exchange rate, and Italy and Great Britain left the European Monetary System (EMS), the Swedish central bank decided to maintain the exchange rate. However, in September 1992 the overnight rate reached 500 per cent and, following some speculative attacks, the central bank was forced to abandon the fixed exchange rate on 19 November 1992 (see Figure 8.7). This decision was taken when the crisis reached its peak; however, it also marked the beginning of the recovery. Between 1990 and 1993, the Swedish GDP went down by more than 5 per cent, but in just a few months the inter-est rates went back to less than 8 per cent and the remarkable devalua-tion of the krona (30 per cent in 1993) favoured exports and helped the Swedish economy to overcome the crisis.

8.3.1 Managing the crisis

Many consider the bank crisis management approach of Sweden as a model. Indeed, its success was based on four main elements (IMF, 2009a):

1 The establishment of the Bank Support Authority (BSA). The new body did not depend on any other financial authority (Ministry of

Figure 8.7 Krona to US$ (Sweden)Source: Thomson Datastream

5

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3. Messico 1994 – 1


featured a more difficult evaluation of the non-performing loans of the banks (such as with the Great Crisis triggered by the subprime mortgage meltdown). Moreover, the krona devaluation speeded up economic recovery and helped to ease the banking crisis.

8.4 The Mexican crisis of 1994–95

The Mexican crisis of 1994–95 marked the beginning of the most acute and probably final phase of this political-economy cycle of finance. Also, this crisis fully reflects the interpretation (illustrated in section 1.1 above) characterized by financial liberalization, capital inflows, high growth of credit and economic boom followed by a crash.

Since 1945, the five attempts made by the Mexican authorities to implement a fixed exchange rate have many similarities: periods of eco-nomic expansion, accompanied by the appreciation of the real exchange rate and the deficit of the current account, which after a few years ended up in a heavy devaluation, the outflow of capital and economic contrac-tions. However, an in-depth analysis of the financial crisis of 1994 shows some new elements. Thanks to previous structural reforms, starting at the beginning of the 1990s, Mexican inflation reached US levels (see Figure 8.8) and public debt went down from 50 per cent to 20 per cent of the country’s GDP (see Figure 8.9). Many companies were privatized, several sectors were deregulated and the NAFTA (North American Free Trade Agreement) agreement with the USA and Canada allowed Mexico

Figure 8.8 Consumer Price Index annual inflation rate (Mexico)Source: Thomson Datastream

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3. Messico 1994 – 2 Recent Financial Crises 65

to enter into a large trading area, with excellent growth prospects based on free trade policies.

The only uncertainty was due to the appreciation of the real exchange rate resulting from the inflow of foreign capital, attracted by good eco-nomic fundamentals, which increased both the aggregate demand and domestic prices. The subsequent increase (decrease) of imports (exports) resulted in a deficit of the current account. The main concerns did not come from the amount of the deficit, which could have been absorbed by the gradual devaluation of the nominal exchange rate, but by its fund-ing. Between 1990 and 1994, only 25 per cent of foreign capital was used for long-term domestic investment, while the remaining 75 per cent was targeted to short-term financial investments, split as follows: 25 per cent shares purchased by foreign investors, 50 per cent government and national bank bonds. At the end of 1993 the latter were four times higher than the value of the currency reserves in the vaults of the central bank. As a consequence, the Mexican financial vulnerability was very high because the capital inflows might have stopped, thus causing a severe liquidity cri-sis. Moreover, because of the fixed exchange-rate regime, the flight of the investors would have challenged the currency reserves of the central bank.

The crisis followed the pattern described by the second-generation models: even though the exchange rate was compatible with the eco-nomic fundamentals of the country, the Mexican devaluation was the result of a sudden loss of confidence in the ability of the country to meet its financial obligations. As a result, the investors did not renew

Figure 8.9 Net public debt (percentage of GDP – Mexico)Source: Thomson Datastream

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3. Messico 1994 – 3


their short-term loans and the government became insolvent. The Banco de Mexico reacted to the capital outflow by reducing its reserves, thus encouraging the speculative attack.

8.4.1 Understanding the crisis

The microeconomic instruments illustrated in Chapter 3 allow a full understanding of the role of the banking system in the Mexican crisis.

Starting from the mid-1980s, Mexico undertook an intense financial liberalization process to get rid of the (lending and deposit) interest-rate ceilings and the limitations imposed on the banking business. This approach led to a growth in bank loans, mainly as a result of foreign capital inflows, which was in turn encouraged by the decision of the Mexican government to implement a fixed exchange rate to eliminate the currency risk for the investors. As a consequence, from the end of the 1980s until the beginning of the financial crisis, lending to the pri-vate sector grew to 45 per cent (see Figure 8.10).

The expansion was so rapid that many low–quality projects were also funded, due to a twofold inefficiency (Mishkin, 1996). The Mexican banks could not properly manage the risks they were facing also because, as already mentioned, many of them were nationalized in 1982 and most loans were granted to the government. When these institutions were privatized in 1990, their ability to screen good clients was very low. Moreover, the rapid growth of the banking assets came as a surprise to the bank supervisory bodies in such an institutionally weak context, to the point that they could not prevent excessive exposure to risk by the bank-ing system. On their part, the depositors and investors felt reassured by

Figure 8.10 Bank credit to private enterprises (percentage of GDP – Mexico)Source: Thomson Datastream

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3. Messico 1994 – 4 68 Liberalization, Crises and Mega-Corporate Bankruptcies

The heavy devaluation of the exchange rate pushed import prices up, which increased the inflation rate (see Figure 8.8). To curb the devalu-ation and to stifle inflation, the central bank significantly increased interest rates, up to 100 per cent. At this juncture, as we will see again in the 1997 Asian crisis, the microeconomic mechanisms described in Chapter 3 were triggered. Because of the short-term debt contracts and their foreign currency denomination and as the information asym-metries grew, the currency crisis became a severe financial one. The peso devaluation reduced the net assets of the banks and enterprises because, on the one hand, the foreign currency liabilities increased but, on the

Figure 8.11 International reserves (US$ billion – Mexico)Source: Thomson Datastream

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Figure 8.12 Mexican pesos to US$Source: Thomson Datastream

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3. Messico 1994 – 5


The heavy devaluation of the exchange rate pushed import prices up, which increased the inflation rate (see Figure 8.8). To curb the devalu-ation and to stifle inflation, the central bank significantly increased interest rates, up to 100 per cent. At this juncture, as we will see again in the 1997 Asian crisis, the microeconomic mechanisms described in Chapter 3 were triggered. Because of the short-term debt contracts and their foreign currency denomination and as the information asym-metries grew, the currency crisis became a severe financial one. The peso devaluation reduced the net assets of the banks and enterprises because, on the one hand, the foreign currency liabilities increased but, on the

Figure 8.11 International reserves (US$ billion – Mexico)Source: Thomson Datastream

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Figure 8.12 Mexican pesos to US$Source: Thomson Datastream

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3. Messico 1994 – 6 Recent Financial Crises 69

other, the value of the assets in the local currency did not change. The soundness of the household and company sectors was also weakened by the increasing interest rates and the collapse this caused on the stock market (almost 40 per cent at the beginning of 1995) (see Figure 8.13).

Screening low-risk from high-risk debtors became more and more dif-ficult (because of heightened adverse selection). Moreover, the reduced borrowers’ net worth decreased the value of the collaterals that, in turn, encouraged their investments on risky projects because, in case of fail-ure, the debtors’ loss would have been smaller (increased moral hazard). The information asymmetry issue weakened the foundations of the banking system, which was trying to cope with the sudden increase of non-performing loans (15 per cent in 1995). Less funds became available to the economy and the resulting short, though severe, recession fur-ther weakened the banking system. Hence, the government had to guar-antee the deposited funds and prevent widespread bank runs. To avoid a worsening of the crisis, the USA and Canada granted a $52 billion loan that allowed the Mexican government to remain solvent. Nonetheless, the Mexican GDP dropped by 7 per cent in 1995. Subsequently, the Mexican recovery started the following year.

8.5 The East Asian crisis of 1997–98

The East Asian crisis of 1997–98 also fully reflects the interpretation (illustrated in section 1.1) characterized by financial liberalization, capital inflows, high growth of credit and economic boom followed by a crash.

Figure 8.13 Stock market (1 at 1 January 1993 – Mexico)Source: Thomson Datastream

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4. Asia orientale 1997-98 – 1 70 Liberalization, Crises and Mega-Corporate Bankruptcies

However, even if it followed the line of the Mexican crisis, the crisis in East Asia was a clear intensification in the pathology of systemic crises. This is for two reasons: a) its extension (the crisis did not affect a single country, but an entire region); and b) the high reputation of the region before the crisis, confirmed by definitions such as ‘Asian tigers’.

The first signal of instability appeared in 1993, when the real exchange-rate appreciation contributed to worsening the current account bal-ances in all five countries affected by the following crisis: in 1996, in percentage to the GDP, the current account deficit was almost 8 per cent in Thailand, 5 per cent in the Philippines, 4 per cent in Malaysia and South Korea, and 2 per cent in Indonesia (see Figure 8.14). The leverage (in term of ratio between debts and capital), which was even 3.5 for the South Korean enterprises, was also quite high for the other countries: 2.3 in Thailand, 1.8 in Indonesia, 1.3 in the Philippines and 1.2 in Malaysia (see Figure 8.15). Companies were excessively indebted in the short term: in 1996, in comparison with 26 and 45 per cent, respectively for the USA and Germany, the ratio between the short-term debt and total debt was 48 per cent in the Philippines, 53 per cent in Indonesia, 57 per cent in South Korea, 63 per cent in Thailand and 64 per cent in Malaysia (see Figure 8.16). Also, a high share of total debt of private firms, ranging between a minimum of 40 per cent in Indonesia and a maximum of 47 per cent in South Korea, was denominated in foreign currency in all five countries. Furthermore, 30 per cent of total debt of private firms in South Korea, Malaysia and Thailand – and a little less in

Figure 8.14 Current account (percentage of GDP – Asia)Source: International Monetary Fund IFS

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4. Asia orientale 1997-98 – 2 Recent Financial Crises 71

the other two countries – was short-term debt in foreign currency (see Figure 8.17). The significant exposure of these firms to exchange risk – due to their high debt in foreign currency, mainly with no coverage of exchange risk – was combined with an equally concerning exposure to interest-rate risk – due to its broad short-term debt component.

So, just a few months after the World Bank had praised their develop-ment model – defining it as the ‘economic miracle of East Asia’ (World

Figure 8.15 Leverage for six East Asian countries, Germany and the USASource: Claessens et al. (1999)

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Figure 8.16 Short-term debt share for six East Asian countries, Germany and the USASource: Claessens et al. (1999)


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4. Asia orientale 1997-98 – 3


the other two countries – was short-term debt in foreign currency (see Figure 8.17). The significant exposure of these firms to exchange risk – due to their high debt in foreign currency, mainly with no coverage of exchange risk – was combined with an equally concerning exposure to interest-rate risk – due to its broad short-term debt component.

So, just a few months after the World Bank had praised their develop-ment model – defining it as the ‘economic miracle of East Asia’ (World

Figure 8.15 Leverage for six East Asian countries, Germany and the USASource: Claessens et al. (1999)

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Figure 8.16 Short-term debt share for six East Asian countries, Germany and the USASource: Claessens et al. (1999)


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1996

Japan




Bank, 1996), due to high growth with high private savings rates, public finance surpluses (or small deficits; see Figure 8.18) and low inflation rates (see Figure 8.19), in contrast with the fragility that led to the crisis in Latin America during the early 1980s – East Asia was affected by the crisis, which burst as a currency crisis initiating in Thailand.

Figure 8.17 Distribution of debt in six East Asian countries (foreign vs domestic and short vs long term)Source: Claessens et al. (1999)

01020304050%

60708090

100

Indon

esia

South

Korea

Malays

ia

Philipp

ines

Taiw

an

Thaila

nd

Foreign Short Term Foreign Long Term

Domestic Short Term Domestic Long Term

Figure 8.18 Government deficit (percentage of GDP – Asia)Source: International Monetary Fund IFS

!5.0!4.0!3.0!2.0!1.0

0.01.02.03.04.05.0

1991

1992

1993

1994

1995

1996

1997

1998

1999




4. Asia orientale 1997-98 – 6 Recent Financial Crises 73

The concerns about Thailand had already started in 1995–96 upon the appearance of signals of loss of external competitiveness – deficit of current accounts – in combination with a public deficit at 3 per cent of the country’s GDP in 1995. As was the case in Mexico, large short-term capital inflows also supported a boost of credit with annual growth rates of more than 20 per cent during the period 1993–96. The credit boost was partly directed to low-quality investments and determined a quick growth of stock and real estate prices. In turn, luring investors with ample capital gains, the sharp growth of these prices attracted even more capital from abroad. Moreover, credit was flowing into a production sec-tor that was already highly indebted – at the end of 1996 the leverage of Thai firms was 2.3, as against 1 in the USA and 1.5 in Germany – through intermediaries subjected to a low and inadequate extent of supervision. Additionally, most of the capital generated credit that resi-dents took in foreign currency with no coverage of exchange risk, hav-ing the expectation that the parity of their national currency with the US dollar would be maintained. Therefore, inflows of short-term capital financed loans for long-term investments – with a dangerous change of maturity – and this credit, whose quality was partly doubtful, brought exchange risk with it.

In July 1997, a speculative attack forced Thai authorities to capitulate, as they had drained foreign currency reserves and the only choice they had was to abandon fixed parity and devalue the Thai bath by more than 20 per cent.

Figure 8.19 Inflation rate (Asia)Source: International Monetary Fund IFS

1991

1992

1993

1994

1995

1996

1997

1998

1999


0

10

20

30

40

50

60




Despite the intervention of international financial institutions, the crisis did not end in Thailand, but spread by contagion to several other countries in the region, which were forced, one by one, to abandon their fixed exchange rate with the US dollar: first to suffer contagion were Indonesia – where the political/institutional instability linked with the fall of Suharto compounded the financial crisis – and South Korea and, although more mildly, the Philippines and Malaysia were affected too. Compared with pre-crisis values (1996), at the peak of the crisis (January 1998) the exchange rates with the US dollar were depreciated by 320 per cent for the Indonesian rupee, 120 per cent for the Thai bath, 90 per cent for the South Korean won, 80 per cent for the Malaysian ringit and 60 per cent for the Philippine peso.

The exchange-rate depreciation was combined with generalized crashes of the stock market indices, and the real growth rate of GDP collapsed from 1996 values of 5.5 per cent in the Philippines and Thailand, 7 per cent in South Korea, 8 per cent in Indonesia and 9 per cent in Malaysia to 1998 values of !13 per cent for Indonesia, !10 per cent in Thailand, !7 per cent for Malaysia and South Korea, and !1 per cent in the Philippines (see Figure 8.20). The repercussions of the crisis were also felt in Hong Kong, Singapore, Taiwan and Japan, while the persistence of capital controls spared China.

As in a long-lasting marriage, what united the Asian tigers in the long period of bursting growth during the 1980s and early 1990s also united them in bad luck. So, for foreign investors, East Asia quickly changed

Figure 8.20 GDP growth (Asia)Source: International Monetary Fund IFS

1991

1992

1993

1994

1995

1996

1997

1998

1999


!20.0

!15.0

!10.0

!5.0

0.0

5.0

10.0

15.0

20.0




Table 8.1 Summary of bank behaviour in the countries affected by the crisis

Indonesia South Korea Malaysia Philippines Thailand

1 Degree of increase in real interest rates following the crisis

Negative real rates until summer 1998; high real rates thereafter

High until summer 1998; moderately high there-after

Moderately high in the earlier part of 1998; then declines

Moderately high in the latter part of 1997; downward trend in 1998

Moderately high in 1997; downward trend in 1998

2 Increase in the spread between lending rate and interest rate on risk-free assets

Yes (but moderate from summer 1998)

Yes Yes Yes Yes (at least temporary third quarter 1997)

3 Extent of decline in the growth of real loans

No significant change in 1997 but sharpest drop in 1998

Sharp decline in first half of 1998

Sharp decline in 1998

Downward trend in 1997; drop in 1998

Slight upward trend in 1997 and sharp decline in 1998

4 Evidence of flight to quality by depositors

4.1 Among domestic banks

4.2 Domestic to foreign banks

From private banks to state banks

From local banks to nationwide banks

From merchant banks and finance companies to commercial banks

From private banks and saving banks to commercial banks

From small banks to large banks

Yes Yes Yes NA Yes

5 Evidence of flight to quality by banks (e.g. via larger holding of Treasury securities)

Yes Yes Yes Yes NA

(continued)

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Table 8.1 Continued

Indonesia South Korea Malaysia Philippines Thailand

6 Evidence of disproportionate contraction in loans to SMEs

Yes Yes No obvious decline but drop in share of small-size loans

Yes (loans drop more in regions where SMEs are concentrated)

NA

7 Increase in the rejection rate of loan applications

NA NA Yes ND NA

8 Shortening in the maturity of financial intermediation

Yes, strongly so Yes Yes No, contrary evidence

NA

9 Evidence on contraction in pre-committed loans

NA Yes Yes NA NA

Source: Domaç et al. (1999)

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5. Russia 1998 – 1 80 Liberalization, Crises and Mega-Corporate Bankruptcies

After the currency crisis in 1994, Russia started a delicate process of domestic stabilization and recovery of international credibility (IMF, 1999). In the first place, with the support of the IMF, a new macroeco-nomic stabilization plan was set up in 1995. However, aid from the IMF was conditional on the achievement of specific objectives in terms of inflation containment; reduction of public deficit; adoption of a fixed exchange-rate regime; and implementation of structural reforms to definitively transform Russia into a market economy. In addition, the heavy public debt inherited from the Soviet Union was restructured, first with the Paris agreements in September 1997 ($60 billion) and then, one month later, with the London agreements ($33 billion). Therefore, limitations on the purchase of Russian government securities by non-residents were removed and international investors trusted in Russia again. Between November 1996 and December 1997 Russia experienced several positive developments: the government was able to place $4.5 bil-lion Eurobonds with a relatively low spread which – compared with US government bonds – was between 330 and 375 base points; the interest rates on short-term government securities denominated in roubles (GKO) went from 100 to 18 per cent (see Figure 8.21) and the share of foreign subscribers of public debt reached 30 per cent (see Figure 8.22).

So, the year 1997 seemed to be the time of the so-long-awaited macroeconomic stability: a) the balance of trade showed signs of equi-librium between imports and exports; b) the inflation rate went from

Figure 8.21 GKO yield (Russia)Source: RECEP, Russian economic trend, various issues

0

50

100

150

200

250

300

Jan–

95

Mar–9

5

May–9

5

Jul–9

5

Sep–9

5

Nov–9

5

Jan–

96

Mar–9

6

May–9

6

Jul–9

6

Sep–9

6

Nov–9

6

Jan–

97

Mar–9

7

May–9

7

Jul–9

7

Sep–9

7

Nov–9

7

Jan–

98

Mar–9

8

May–9

8

Jul–9

8

%



5. Russia 1998 – 2 Recent Financial Crises 81

200 to 15 per cent during the period 1995–97 (see Figure 8.23); c) the exchange rate fluctuated within a limited range between 5 and 6 roubles per US dollar (see Figure 8.24); d) the high price of oil ($25 per barrel) had very positive effects on the value of Russian exports; e) GDP, for the first time since 1992, showed a positive growth (!0.9 per cent). The favour-able context pushed up the stock market, which grew by more than 100 per cent during the first nine months of 1997 (see Figure 8.25).

However, many problems remained unsolved. The main concerns came from the degree of inefficiency of the fiscal system, which gener-ated a persistent deficit (see Figure 8.26), and high public debt, mainly in foreign currency and at short term.

Figure 8.22 Distribution of GKO/OFZ holdings (June 1998 – Russia)Source: Our estimates

Banks; 42%

CBR; 21%Others; 7%

Non-Resident; 30%

Figure 8.23 CPI annual inflation rate (Russia)Source: Thomson Datastream

0

50

100

150

200

250

Jan–

95

Apr–9

5

Jul–9

5

Oct–95

Jan–

96

Apr–9

6

Jul–9

6

Oct–96

Jan–

97

Apr–9

7

Jul–9

7

Oct–97

Jan–

98

Apr–9

8

Jul–9

8

Oct–98

Jan–

99

Apr–9

9

Jul–9

9

Oct–99

%



5. Russia 1998 – 3 82 Liberalization, Crises and Mega-Corporate Bankruptcies

With these weaknesses, the two shocks affecting Russia in the second half of 1997 opened the way to crisis. On the one hand, the oil-price drop reduced the value of Russian exports by approximately 20 per cent and further depressed tax revenues. On the other hand, the East Asian crisis put the exchange rate of many emerging economies, includ-ing Russia, under heavy pressure. In November 1997, to roll-over the GKOs approaching their term, the central bank started a long series of interest-rate increases, while, on the currency exchange market, it lost

Figure 8.24 Roubles to US$Source: Thomson Datastream

0

5

10

15

20

25

Jan–

95

Apr–9

5

Jul–9

5

Oct–95

Jan–

96

Apr–9

6

Jul–9

6

Oct–96

Jan–

97

Apr–9

7

Jul–9

7

Oct–97

Jan–

98

Apr–9

8

Jul–9

8

Oct–98

Jan–

99

Figure 8.25 Equity index (RTS ! 1 at September 1995 – Russia)Source: Thomson Datastream

0

100

200

300

400

500

Sep–9

5

Dec–9

5

Mar–9

6

Jun–

96

Sep–9

6

Dec–9

6

Mar–9

7

Jun–

97

Sep–9

7

Dec–9

7

Mar–9

8

Jun–

98

Sep–9

8

Dec–9

8

Mar–9

9

Jun–

99

Sep–9

9

Dec–9

9

Mar–0

0

Jun–

00

Sep–0

0

Dec–0

0



5. Russia 1998 – 4


With these weaknesses, the two shocks affecting Russia in the second half of 1997 opened the way to crisis. On the one hand, the oil-price drop reduced the value of Russian exports by approximately 20 per cent and further depressed tax revenues. On the other hand, the East Asian crisis put the exchange rate of many emerging economies, includ-ing Russia, under heavy pressure. In November 1997, to roll-over the GKOs approaching their term, the central bank started a long series of interest-rate increases, while, on the currency exchange market, it lost

Figure 8.24 Roubles to US$Source: Thomson Datastream

0

5

10

15

20

25

Jan–

95

Apr–9

5

Jul–9

5

Oct–95

Jan–

96

Apr–9

6

Jul–9

6

Oct–96

Jan–

97

Apr–9

7

Jul–9

7

Oct–97

Jan–

98

Apr–9

8

Jul–9

8

Oct–98

Jan–

99

Figure 8.25 Equity index (RTS ! 1 at September 1995 – Russia)Source: Thomson Datastream

0

100

200

300

400

500

Sep–9

5

Dec–9

5

Mar–9

6

Jun–

96

Sep–9

6

Dec–9

6

Mar–9

7

Jun–

97

Sep–9

7

Dec–9

7

Mar–9

8

Jun–

98

Sep–9

8

Dec–9

8

Mar–9

9

Jun–

99

Sep–9

9

Dec–9

9

Mar–0

0

Jun–

00

Sep–0

0

Dec–0

0



5. Russia 1998 – 5 Recent Financial Crises 83

approximately $6 billion foreign currency reserves within one month to defend the rouble (see Figure 8.27).

This was added to deep political instability. In March 1998, President Boris Yeltsin dismissed all members of the government and appointed the young and inexpert Sergei Kiriyenko as Prime Minister. In May, the investors’ confidence was further weakened by Kiriyenko’s refusal to meet the US Secretary of the Treasury Lawrence Summers who was visiting Russia. That international incident marked the beginning of massive sales of Russian government bonds by international investors.

Figure 8.26 Federal budget deficit to GDP (Russia)Source: RECEP, Russian economic trend, various issues

!14

!12

!10

!8

!6

%

!4

!2

01992 1993 1994 1995 1996 1997 1998

Figure 8.27 International reserve (US$ billion – Russia)Source: Thomson Datastream

1012141618202224262830

Jan–

96

Mar–9

6

May–9

6

Jul–9

6

Sep–9

6

Nov–9

6

Jan–

97

Mar–9

7

May–9

7

Jul–9

7

Sep–9

7

Nov–9

7

Jan–

98

Mar–9

8

May–9

8

Jul–9

8

Sep–9

8

Nov–9

8

Jan–

99

Mar–9

9

May–9

9

Jul–9

9

Sep–9

9

Nov–9

9

Jan–

00



5. Russia 1998 – 6


approximately $6 billion foreign currency reserves within one month to defend the rouble (see Figure 8.27).

This was added to deep political instability. In March 1998, President Boris Yeltsin dismissed all members of the government and appointed the young and inexpert Sergei Kiriyenko as Prime Minister. In May, the investors’ confidence was further weakened by Kiriyenko’s refusal to meet the US Secretary of the Treasury Lawrence Summers who was visiting Russia. That international incident marked the beginning of massive sales of Russian government bonds by international investors.

Figure 8.26 Federal budget deficit to GDP (Russia)Source: RECEP, Russian economic trend, various issues

!14

!12

!10

!8

!6

%

!4

!2

01992 1993 1994 1995 1996 1997 1998

Figure 8.27 International reserve (US$ billion – Russia)Source: Thomson Datastream

1012141618202224262830

Jan–

96

Mar–9

6

May–9

6

Jul–9

6

Sep–9

6

Nov–9

6

Jan–

97

Mar–9

7

May–9

7

Jul–9

7

Sep–9

7

Nov–9

7

Jan–

98

Mar–9

8

May–9

8

Jul–9

8

Sep–9

8

Nov–9

8

Jan–

99

Mar–9

9

May–9

9

Jul–9

9

Sep–9

9

Nov–9

9

Jan–

00



6. Fallimento LTCM – 1

•  Gli algoritmi dei premi Nobel

•  Arbitraggi: tempi normali vs. speciali (fat tails)

•  Tra effetti domino e moral hazard


7. Depressione giapponese – 1 Recent Financial Crises 103

for access to the bond market by the firms and the creation of the commercial paper market.

These developments had important consequences for the banking system, because the increased competition reduced the interest margin and pushed banks to look for alternative sources of income in more risky sectors, where they had no experience. In particular, loans to con-sumers, the real estate sector, and small and medium-sized enterprises significantly increased. The hike of stock and the real estate market price triggered the balance-sheet channel (see section 4.2.1 above), which strengthened the credit expansion.

As in other historical situations, the sequence of events included, first, the burst of the equity bubble and then the burst of the real estate bub-ble. Between 1990 and 1991, the Nikkei 225 index lost one-third of its value and further decreased to 15,000 in 1998, and down to 8000 at the end of 2002. After 1991, the drop of the land price in the main cities, although it was less abrupt, had a similar trend. The sudden slowdown of the Japanese economy – GDP growth dropped from 6 per cent to approximately 1 per cent – continued up until 1995.

In 1996, there seemed to be a significant recovery, pushed by a strong expansive fiscal action. However, the recovery was transitory. In 1997, there was a new slowdown, which degenerated into recession in 1998, when – as we have seen – Japan was also partly involved in the East Asian crisis. Despite the massive fiscal expansion, which was sharply intensified in 1998 – when the deficit/GDP ratio left the 4 per cent area, went up to almost 9 per cent and remained above 5 per cent during the

Figure 8.34 Japan double bubbleSource: our elaboration

-2.0004.0006.0008.000

10.00012.00014.00016.00018.00020.000

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

-

5.000

10.000

15.000

20.000

25.000

30.000

35.000

40.000

All land Six largest cities NIKKEI 225 (right scale)



7. Depressione giapponese – 2 106 Liberalization, Crises and Mega-Corporate Bankruptcies

where it is the short-term rate selected by the central bank on the basis of parameters, which are all positive: a1 (the weight given to the infla-tion objective), a2 (the weight given to the objective of containing the output gap, which is GDP deviation from its potential level) and r, which expresses the wish to smoothen the interest rate (i.e. to avoid changing it too abruptly). When pt ! 0 (i.e. we are in deflation) and also the output gap is negative (i.e. we are in recession), and it"1 has also been brought to zero, then Taylor’s rule implies fixing it ! 0, which is normally not possible.

The consequence is that the output gap becomes even more negative and the price drop intensifies, causing a deflationary spiral, which can be unstable (Benhabib et al., 1999). For some time, Krugman (2000) suggested that even in liquidity traps induced by nominal rates almost at zero and continuous deflation, it is possible to use monetary policy, assigning to it the objective of generating inflation expectations, hence lowering the real interest rate and stimulating private demand. In fact, by accelerating the creation of the monetary base, it is possible to ingenerate in the operators the expectation that in the future the monetary value will be reduced in terms of consumption (i.e. prices increase), or in relation to the other currencies (yen depreciation, her-ald of imported inflation). However, it seems that Krugman’s recipe was never followed with determination in Japan.

Figure 8.35 Liquidity trap

i

Y

i0 = i1

IS0 IS1

LM

Y0 Y1



8. Megafallimenti societari – 1

•  I certificatori collusi

•  Le agenzie di rating

•  Le risposte: Sarbanes-Oxley ecc.

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