Events related to the Crash

• Camdessus (of the IMF) sees no reason to impose a moratorium on the next U.S. $4.5 billion in IMF loans to Russia, in spite of the revealing of the ROCML Scheme@BNY. However, Russia's central bank has been caught lying to the IMF about its foreign currency reserves in 1996, and on its transactions with its offshore unit Fimaco (no date inferrable from CNNfn).
• Japan seems to have pulled off at least a temporary macroeconomic recovery -- while simultaneously achieving record unemployment levels. Japan's jobless rate remained at 4.9% for July 1999, and there were 46 job offers for every 100 applicants in July 1999.
• The IMF has finally announced results on negotiations with Ecuador. The IMF has negotiated an Ecuadorian economic plan that the IMF is willing to back up with a standby loan plan. However, the IMF has not confirmed that Ecuador's Brady bond default [on August 28, 1999; reschedule for September 1999] is part of the negotiated plan: there is still no evidence that this bond default is negotiated.

• The race is on to report suspicious Russian banking activity before the law enforcement agencies find it. So far, Switzerland's UBS, Germany's DeutscheBank, and the U.S. subsidiary Bankers Trust of DeutscheBank have reported such activity to U.S. authorities. Bankers Trust has also filed a report with the U.S. Treasury Department's Financial Crimes Enforcement Network.
• [Red] China has announced a new stimulus package for its economy (currently in a macroeconomic depression). Key points:
• A 60 billion yuan (~U.S. 7.25 billion) issue has been authorized.
• A tax on interest from savings accounts has been authorized (this had formerly been tax-exempt income in China). The structure of the tax has not been finalized yet.
• The plan is to use the money from the new tax to increase subsidies and allowances for state workers [retroactive to July 1, 1999], raise minimum incomes for urban dwellers, and to meet pension payments that are badly in arrears [due by October 1, 1999]
• Annual 2Q 1999 macroeconomic growth has been estimated at 7.1%, in contrast with annual 1Q 199 macroeconomic growth (which was estimated at 8.3%). 8% is a political target for economic growth. These economic growth figures are coexisting quite nicely with deflation.
• The investigation of the ROCML Scheme@BNY was initiated by the U.S. FBI in August 1998, when the Republic Bank of New York brought unusual money transfers to the attention of the FBI.
• The CEO and CFO of the Bank of New York, Thomas Renyi, has announced a comprehensive review of the Bank of New York's funds transfer controls and processes -- with a disclaimer that the current ones are already sound and effective.
• The company Benex, linked to Lucy Edward's husband Peter Berlin [cf. August 27, 1999] had nine accounts with the Bank of New York. There is reasonable cause for suspecting Russian organized crime ties with Benex.

• Russia's Federal Security Service [the latest incarnation of the KGB] has joined in the investigation of the ROCML Scheme@BNY, as an explicit ally of the U.S. and Great Britain. The current lower bound of money laundered by this scheme, alone, is now U.S. $15 billion [i.e., 75% of Russia's 1998 capital flight of U.S. $20 billion.]
• U.S./British investigation targets:
• Konstantin Kagalovsky: former deputy of the ex-bank Menatep Bank, shut down by the Russian ruble collapse in August 1998
• His wife Natasha: suspended from the Bank of New York on or before August 20, 1999
• Lucy Edwards, wife of Peter Berlin: suspended from the Bank of New York on or before August 20, 1999; fired on August 27, 1999.
• Trivium: Two U.S. laws require U.S. banks to report all cash deposits of $10,000 or more.

• Still no confirmations regarding Ecuador's Brady bond deferment/default. It appears that while there are negotiations going on, even the major points have not been agreed on yet. However, it has become clear that any negotiated default on Ecuador's Brady bonds will also be a negotiated default on Ecuador's Eurobonds. It is also clear that the U.S. will impose economic reforms as one of the conditions in any negotiated default. I'm not certain how successful this will be. [No one said an 'economic reform' was an improvement....]
• Ecuador's government has a proven track record of being unable to ram economic reforms down the throats of its citizens. [More precisely, the unions are more powerful than the government on these issues. The unions have successfully forced the government to undo economic reforms already (a gas price hike comes to mind).]
• Let me emphasize 'negotiated' here. I have no evidence that any of Ecuador's statements are backed by negotiation...although negotiations are definitely occurring.

• Italy's pension system is posing an 'imminent' (months?) danger of removing Italy from the Eurozone.
• It appears politically infeasible to renegotiate the once-revised budgetary targets outlined in the Maastricht treaty.
• However, Italian cabinet undersecretary Franco Bassanini describes the imposing of limitations on "super-pensions" as follows: "I know it is a radical, drastic measure and that many will object...but it's a measure that must be studied."
• South Korea has directly contradicted the Japanese corporation Nissan on whether Nissan is in talks to buy Samsung's automobile unit.
• Several South Korean senior finance ministry officials have declared that such negotiations are in progress, citing Nissan's contract for providing technical assistance as evidence. They believe the negotiations will become official when Samsung's bankruptcy protections for its auto unit become active in the end of October 1999.
• Nissan, however, descibes the situation as follows: "There is no truth that we are in talks with Samsung as reported. We are not considering purchasing its car unit, either. We have made a contract to provide technical assistance to Samsung, which will continue for now, but we do not plan to do anything beyond that."
• Any strategic decision by Nissan must be authorized by French car-maker Renault, who is in the middle of coordinating a Japan-mandated reorganization of Nissan. Nissan is not in a reasonable position to buy any car unit....
• South Korea has effectively named a deadline to measure which one of South Korea and Nissan definitely is mistaken: November 1, 1999. Whoever is incorrect, loses face.
• The cabinet of the German Chancellor Gerhard Schroeder has approved a series of austerity measures aimed at cutting 30 billion marks (~U.S. 16$ billion) from Germany's state spending for the next fiscal year.
• Germany's taxation rate is among the highest in the Eurozone. This is an intrinsic negative. Also, Germany is heavily exposed to Russia [who is among the top three in severity of the Crash: the others are Indonesia and Ecuador]. I do not believe the effects of the Crash (acquired from Russia) are clearly distinguishable from the effects of Germany's taxation rate, combined with the creation of the Eurozone.
• The reforms are at risk of being snuffed by five state elections later this year [1999].
• Key points:
• 7% cut in ministerial budgets
• 2 year cap on state pension increases in real terms
• higher energy taxes
• removal of many state subsidies to industry
• The SPD government of the Southwestern state of Saar has committed to vote against the reforms unless the pension measure is removed. This is likely to get its allocation of funds from the national budget slashed in retaliation.
• The U.S. House Banking Committee is starting an investigation of how overseas corruption and international money laundering is impairing the U.S. financial system, probably in September. Banking Chairman Jim Leach, an Iowa Republican, has described Russia's recent government as "kleptocratic", and apparently is planning to direct the investigation with especial emphasis on diversion of IMF funds.

• Jamil Mahuad, President of Ecuador, has announced that Ecuador will defer the interest payment (due August 28) on $96 million in Brady bonds by 30 days. While he claims a negotiated agreement with the IMF, etc., no details of the restructuring plan are available. Also, no confirmation of this has come from either the U.S. or the IMF.
• If independent confirmation does not appear by, or on, August 28, I will conclude that this is a unilateral action, contrary to Jamil's statements on August 20th.

• A U.S. investigation of a multi-billion [up to $10 billion] U.S. dollar money-laundering scheme involving Russian organized crime has found reasonable cause to believe that $200 million of the 1998 IMF bailout was diverted to Russian organized crime and then laundered through this scheme.
• This was detected at the Bank of New York. Switzerland banks Credit Suissé and UBS, Germany's Dresdner and Westdeutsche Landesbank, and Luxembourg's Banque Internacional à Luxembourg have also been identified as used in this scheme. None of these banks are accused of any wrongdoing.
• Credit Suissé has already had several branches removed from Japan for obstructing investigations into derivatives trading by banking branches rather than securities trading branches. This makes the Japan regulatory move look fully justified, rather than political fabrication.
• Russia has an estimated U.S. $20 billion/year capital flight problem.
• [Margot Jacobs, banking analyst at the United Financial Group in Moscow]: "They're clearly not going after the right targets. The people they should be going after are the various companies and groups that export ... large amounts of cash."
• Observe (above) that up to $10 billion of that capital flight is through that single Russian organized crime money laundering scheme alone. There are almost surely other Russian organized crime money laundering schemes operating. Apparently, most (if not all) of Russia's capital flight is mediated by Russian organized crime.
• The latest ineffective procedure Russia is using is: prohibiting foreign travelers from taking foreign currency out of Russia. [Except, of course, if it is declared when coming into Russia. Russian ATMs do not count.]

• Ecuador's government has pledged not to declare a unilateral moratorium on its debt payments.
• Russia has already done this.
• I owe extreme apologies to all governmental officials of Indonesia: contrary to an initial error in this article, Indonesia is current on all of its national loans.
• If Ecuador were to do this, it would default on U.S. Brady bonds -- a historic first. Not even Russia has done this.
• Ecuador is in the middle of discussing a restructuring of U.S. Brady bonds (in particular, over $94 million in interest due August 31, 1999). Defaulting on the principal of U.S. Brady bonds is almost impossible; the principal is collateralized by U.S. Treasury zero-coupon bonds. These Brady bonds are the result of a 1994 restructuring.
• The mere mention of discussing restructuring of these bonds sent both the Mexican peso and the Brazilian real down.

• Samsung, a South Korean chaebol, is at risk (within 2 weeks) of having its credit lines frozen unless it devises a credible cleanup plan for its unit Samsung Motors (which it is trying to get rid of).
• China's state-controlled paper, the China Economic Times, reported a trade surplus decline year-on-year as follows:
• Jan.-July 1999: $11.3 billion, vs. Jan.-July 1998: $26.71 billion
• That is, a decline of about 57.7%
• July 1999: $3.42 billion vs. July 1998: $4.2 billion
• That is, a decline of about 18%
• Jan.-July 1999 exports fell 2.8% to $100.2 billion, compared to Jan.-July 1998
• Jan.-July 1998 exports should have been reported at about $103.1 billion
• Jan.-July 1999 imports rose 16.6% to $88.9 billion, compared to Jan.-July 1998
• Jan-July 1998 imports should have been reported at about $76.3 billion
• July 1999 exports rose 7.5% to $17.34 billion (compared to July 1998?)
• July 1998 exports should have been reported at about $16.1 billion
• July 1999 imports rose 16.7% to $13.92 billion (compared to July 1998?)
• July 1998 imports should have been reported at about $11.9 billion
• Q1 1999 exports fell 7.9% compared to Q1 1998
• Q2 1999 exports fell 1.3% compared to Q2 1998
• Jan.-July 1999 exports of machinery and electrical products grew 11.3% compared to Jan.-July 1998
• It appears that China has correctly evaluated that its economy has started to fall into an import-export choke [much like Japan]. China is taking appropriate actions to directly end this situation.

• Daewoo, a South Korean chaebol that has floated dozens of reorganization plans in the last few months, is in imminent (months?) danger of failure. It also has political must-not-fail status, due to its extreme size. Creditors are now demanding the sale of the two most profitable units (??). Daewoo has net assets of 76.7 trillion won, and an estimated total debt of 60 trillion won.

• Malaysian Finance Minister Daim Zainuddin has called for the weakening of margin requirements on margin loans to retail customers, in order to boost the Malaysian stock market, which has been going down for the past two weeks.
• The Malaysian stock market had tripled since October, 1998. A serious correction is in order, anyway -- 15% to 20% would be reasonable.
• The Malaysian Firewall only protects from external problems! Finance Minister Daim Zainuddin is deliberately creating the situation that crashed the Malaysian stock market in 1998 (exposure to stock investors and property developers), in such a way that it sets up an analog of U.S.A.'s Black Tuesday, 1929. It's the qualifier that is truly alarming.
• If Daim Zainuddin's policies are not overridden "soon" (months? Years?), Malaysia is in danger of reaping a self-inflicted stock market annihilation that makes the Malaysian Firewall meaningless.

• Indonesia had a 1.05% deflation for July 1999. The Indonesian economy has apparently been deflating since March 1999. The summary is:
• March 1999: 0.18%
• April 1999: 0.68%
• May 1999: 0.28%
• June 1999: 0.34%
• July 1999: 1.05%
• Indonesia's inflation target for March 1999-February 2000 was revised from 17% to 10% "recently" [July 1999?? This story was relayed by CNN Custom from Xinhua.]