Banking Crises by Garett Jones

Author:Garett Jones
Language: eng
Format: epub
ISBN: 9781137553805
Publisher: Palgrave Macmillan

4.4 Default: the Russian and Argentine crises

Russia. The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union in 1991 enabled the IMF at last to become a (nearly) universal institution. In three years, membership increased from 152 countries to 172, the most rapid increase since the influx of African members in the 1960s. The IMF supported programmes in most former Eastern Bloc countries and newly independent ex-Soviet Republics to help ease the transition to a market economy. The contribution the IMF made to the speed and relative smoothness of this transition is, perhaps, one of its most singular and least-heralded achievements.

Russia, however, got off to an inauspicious start under the first stand-by arrangement with the Fund in 1992. The IMF encountered intense difficulties in influencing the Russian leadership (Odling-Smee, 2004). GDP fell for several years under the IMF-supported combination of macroeconomic stabilization and industrial restructuring. Although the IMF can claim credit for helping to instil some monetary discipline by the mid-1990s, the process took time, foreign direct investment remained low, tax collection was poor, and the fiscal deficit remained large. Growth in real GDP did re-emerge by 1997. But, following the onset of the East Asian crisis, the ruble came under speculative attack in November 1997. Pressure on the ruble was compounded by foreign investors’ attempts to hedge their ruble holdings, as well as by a drop in the price of oil, which accounted for about one-third of Russia’s foreign-exchange inflows.

Russia sought additional IMF financing in early 1998, but agreement on the terms of a new programme could not be reached owing, in part, to a failure by the Russian authorities to secure an increase in fiscal revenue. As a result, foreign investors began to unload Russian assets and about US$4 billion fled the country in the summer of 1998. By the time additional IMF financing was agreed in July 1998, fears of a devaluation led to such a pronounced sell-off of Russian securities that the authorities were forced to devalue the ruble and halt payments on both domestic and foreign debt.

Although the Fund is routinely criticized for providing cover for private capital flight from Russia in the first half of 1998, private investors who maintained faith that the Fund would rescue Russia sustained even greater losses when the ruble was devalued. This was perhaps the largest case to that point where the Fund stepped away from a floundering member, declared a solvency crisis, and let private creditors sustain substantial losses. It marked a different approach to the challenge of balancing creditor and debtor interests from that which the Fund had adopted in East Asia. And in some ways it set a precedent for the Fund’s handling of the Argentine crisis in 2001.

Argentina. After a sustained period of hyperinflation in the 1980s, Argentina decided in 1991 to peg its currency, the peso, to the US dollar under a quasi currency-board regime at a one-to-one parity. Although the Fund cautioned that Argentina had neither the fiscal

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