An Analysis of Russia's 1998 Meltdown: Fundamentals and Market Signals

Kharas, Homi; Pinto, Brian; Ulatov, Sergei

doi:10.1353/eca.2001.0012

Cited by 95 publications

(66 citation statements)

References 26 publications

(19 reference statements)

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“…1 Kharas, Pinto, and Ulatov (2001) provide a history from a fundamentalsbased perspective, focusing on taxes and public debt issues. We endeavor to incorporate a role for monetary policy.…”

Section: Currency Crises: What Does Macroeconomic Theory Suggest?mentioning

confidence: 99%

Case Study of a Currency Crisis: The Russian Default of 1998

Chiodo¹,

Owyang²

2003

ICPSR Data Holdings

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A currency crisis can be defined as a speculative attack on a country's currency that can result in a forced devaluation and possible debt default. One example of a currency crisis occurred in Russia in 1998 and led to the devaluation of the ruble and the default on public and private debt. 1 Currency crises such as Russia's are often thought to emerge from a variety of economic conditions, such as large deficits and low foreign reserves. They sometimes appear to be triggered by similar crises nearby, although the spillover from these contagious crises does not infect all neighboring economies-only those vulnerable to a crisis themselves.In this paper, we examine the conditions under which an economy can become vulnerable to a currency crisis. We review three models of currency crises, paying particular attention to the events leading up to a speculative attack, including expectations of possible fiscal and monetary responses to impending crises. Specifically, we discuss the symptoms exhibited by Russia prior to the devaluation of the ruble. In addition, we review the measures that were undertaken to avoid the crisis and explain why those steps may have, in fact, hastened the devaluation.The following section reviews the three generations of currency crisis models and summarizes the conditions under which a country becomes vulnerable to speculative attack. The third section examines the events preceding the Russian default of 1998 in the context of a currency crisis. The fourth section applies the aforementioned models to the Russian crisis. CURRENCY CRISES: WHAT DOES MACROECONOMIC THEORY SUGGEST?A currency crisis is defined as a speculative attack on country A's currency, brought about by agents attempting to alter their portfolio by buying another currency with the currency of country A. 2 This might occur because investors fear that the government will finance its high prospective deficit through seigniorage (printing money) or attempt to reduce its nonindexed debt (debt indexed to neither another currency nor inflation) through devaluation. A devaluation occurs when there is market pressure to increase the exchange rate (as measured by domestic currency over foreign currency) because the country either cannot or will not bear the cost of supporting its currency. In order to maintain a lower exchange rate peg, the central bank must buy up its currency with foreign reserves. If the central bank's foreign reserves are depleted, the government must allow the exchange rate to float up-a devaluation of the currency. This causes domestic goods and services to become cheaper relative to foreign goods and services. The devaluation associated with a successful speculative attack can cause a decrease in output, possible inflation, and a disruption in both domestic and foreign financial markets. 3 The standard macroeconomic framework applied by Fleming (1962) and Mundell (1963) to international issues is unable to explain currency crises. In this framework with perfect capital mobility, a fixed exchange rate regim...

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“…1 Kharas, Pinto, and Ulatov (2001) provide a history from a fundamentalsbased perspective, focusing on taxes and public debt issues. We endeavor to incorporate a role for monetary policy.…”

Section: Currency Crises: What Does Macroeconomic Theory Suggest?mentioning

confidence: 99%

Case Study of a Currency Crisis: The Russian Default of 1998

Chiodo¹,

Owyang²

2003

ICPSR Data Holdings

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“…19 What is more interesting is that when the international multilateral organizations failed to intervene in August 1998 and Russia defaulted on its domestic bonds, other countries spreads increased substantially as well. It seems that international investors did take the absence of intervention to mean that the IMF might no 19 For a detailed chronology of the fiscal crisis that led to the Russian default and its aftermath, see Kharas et al (2001). Kharas et al (2001) assert "Portfolio investors might have been anticipating a large bailout that would at least postpone a crisis and keep their one-way bet for a few more lucrative months" (p. 42).…”

Section: The Russian Defaultmentioning

confidence: 99%

“…It seems that international investors did take the absence of intervention to mean that the IMF might no 19 For a detailed chronology of the fiscal crisis that led to the Russian default and its aftermath, see Kharas et al (2001). Kharas et al (2001) assert "Portfolio investors might have been anticipating a large bailout that would at least postpone a crisis and keep their one-way bet for a few more lucrative months" (p. 42). They quote market commentary from the same time to support their claim.…”

Section: The Russian Defaultmentioning

confidence: 99%

Do IMF Bailouts Result in Moral Hazard? An Events-Study Approach

Noy

2003

SSRN Journal

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The IMF creates "moral hazard," when it provides bailouts to countries that face a BOP crisis. Two central questions are posed: is moral hazard observable in the data; and, if it is, what is its magnitude? We search for evidence that the unprecedented bailouts of the last decade have changed the investing environment in such a way that international investors started believing that their investments were insured. Our eventsstudy is based on IMF-led events identified as both important and unexpected, such as the bailout loan for Mexico in 1995 and the absence of one for Russia in 1998. Our conclusion is negative: no such change in the moral hazard effect was observed. We demonstrate that events surrounding the out-of-sample On Moral Hazard in International LendingThe last decade has been a decade of spectacular currency, balance-ofpayments and banking crises and equally spectacular and controversial bailouts.The problem of moral hazard in international crisis lending has consequently become very prominent in policy and academic discussions. A concern with moral hazard was one of the principal issues discussed in the Meltzer Commission's report on the International Financial Institutions (Meltzer, 2000). Moral hazard remains as the most prominent reason for criticism against the IMF from several prominent researchers and policymakers (e.g., Calomiris, 2000;Bordo and Schwartz, 2000; Meltzer, 2000;and Niskanen, 1999). Yet, in spite of numerous policy discussions on the topic, very little empirical work to date has been done on this issue. 2The current literature differentiates between moral hazard on the creditors' and on the debtors' sides. From the debtors' perspective, the implied or even explicit insurance/bailout enables domestic borrowers to increase their risk exposure beyond the optimal level in the absence of insurance, as, in case of a negative 1 See Hutchison (2003) for a description of IMF programs and their size. The term 'bailout' is used here, as elsewhere in the literature, even though these support packages are subsidized loans that are almost always repaid on time. The magnitude of the subsidy is debatable since IMF loans face a different default risk than private or even other public lending as IMF loans are almost always paid back on time. For analysis of repayment experiences to the IMF, see Aylward and Thorne (1998). 2 The only exceptions of which we are aware are Lane and Phillips (2000), Dell'Ariccia et al. (2002), Kamin (2002) and Dreher and Vaubel (2001). The last one only examines debtor moral hazard and is therefore not directly related to our work. The other three are surveyed in the next section.3 shock that will leave them unable or unwilling to repay in full, they will be at least partially bailed out.Our work focuses on the other side of a moral hazard in international bailouts -namely the creditors' moral hazard effect. As creditors are aware that they will be bailed out in case of a balance-of-payment crisis in an emerging economy, their behavior changes. This has often b...

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“…The same problems as for the case of the Czech Republic come up if the indicator proposed by Collins (1984) 7 For an excellent account of the Russian crisis, see Kharas et al (2001) Table 1: Pre-crisis forecasting exercise: Czech koruna/US dollar is used, since the probability ratio turns negative in some periods due to the downward-sloping term structure of Russian interbank rates. Figure 5 presents the Russian ruble/USD exchange rate together with the indicator I 7,30,t for the period April-September, 1998, after assuming δ t = 1, ρ 7 = 0 and adding a constant (one in this case) to the denominator of the expression in (10) so as to avoid negative implied probabilities.…”

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confidence: 99%

An 'Almost-Too-Late' Warning Mechanism for Currency Crises

Cuaresma

Slačík

2007

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe propose exploiting the term structure of relative interest rates to obtain estimates of changes in the timing of a currency crisis as perceived by market participants. Our indicator can be used to evaluate the relative probability of a crisis occurring in one week as compared to a crisis happening after one week but in less than a month. We give empirical evidence that the indicator performs well for two important currency crises in Eastern Europe: the crisis in the Czech Republic in 1997 and the Russian crisis in 1998.

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An Analysis of Russia's 1998 Meltdown: Fundamentals and Market Signals

Cited by 95 publications

References 26 publications

Case Study of a Currency Crisis: The Russian Default of 1998

Case Study of a Currency Crisis: The Russian Default of 1998

Do IMF Bailouts Result in Moral Hazard? An Events-Study Approach

An 'Almost-Too-Late' Warning Mechanism for Currency Crises

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