Events related to the Crash

• Ecuador's inflation rate for Jan. 1999-Oct. 1999 was 43.1% [if this were annualized, this would be 47.2%. The Oct. 1999 month rate [4.2%] was thought to be mostly due to the weakening of the Ecuadorian sucre versus the U.S. dollar. If this continues, there are concerns that Ecuador could suffer hyperinflation.

• Kitahyogo Shinyo Kumiai, a regional credit cooperative based in Hyogo, is the first Japanese financial firm to file for insolvency in Japan -- due to buying fraudulent bonds from the U.S. investment firm Princeton Economics International. The current upper bound on how much Princeton Economics International defrauded is U.S.$1 billion.
• Kitahyogo Shinyo Kumiai was reported as having a net worth of -¥600 million, induced by "Princeton notes" sold by Cresvale International, a unit of Princeton Economics International.
• Japan's FSA ordered the Tokyo branch of Cresvale International (on October 28, 1999) to shut down from November 1, 1999 to January 14, 2000, due to violations of Japanese securities laws (namely, failing to hold clients' investments in separate accounts).
• Toshio Miki, usually not an outspoken member of the Bank of Japan's policy board, violated a BOJ taboo by suggesting (as a personal opinion) the central bank may have to purchase more Japanese government debt if interest rates got higher. He also caught currency traders off-guard by specifying an acceptable rate of ¥110/U.S.$1. [This is the same as the one several Japanese auto manufacturers have already stated they need to avoid fiscal damage.] While the BOJ did extensive attempts to interpret these comments in a way consistent with current BOJ policy...this proved too difficult to do convincingly.

• Japan's Sept. 1999 unemployment rate has dropped to 4.6%, while Japan's household spending fell by 3.7% in real terms. The conventional factors behind Japan's deflationary spiral have apparently not been stopped yet. Overtime compensation rose by 3.7%, while physical overtime rose by 1.1% [these two are Sept. 1999 compared to Sept. 1998]. Japan's unemployment rates for:
• Aug. 1999: 4.7%
• July 1999: 4.9%
• June 1999: 4.9%

• It turns out that the Daewoo debt restructuring talks (starting October 29, 1999) are important because Daewoo is currently directly responsible for 5% of South Korea's GDP.

• Ecuador is expected to begin debt restructuring talks with its creditors in New York on October 27, 1999. These talks are expected to take longer than similar talks between banks and Latin American countries started in the 1980's, which took nearly a decade to complete.
• A preliminary list of those with large holding of Ecuador bonds includes:
• the investment management unit of Travellers Group
• Alliance Capital Management
• Ashmore Investment Management
• ABN-Amro Bank
• Lloyds Bank PLC
• the wealthy Dart family/Group (led by heir to the family fortune Kenneth Dart).
• It has not been confirmed (contrary to reports in the Wall Street Journal) that the Dart group is sending a representative to the talks.
• The Dart group holds about 25% of Ecuador's PDI bonds.
• The Dart group bought most of their exposure between when the interest payment was deferred in late August 1999, and when Ecuador formally defaulted in late September 1999.
• South Korea has restructured a loan to Russia. The initial loan was U.S.$1 billion with a maturity of 5 years and a grace period of 3 years, in 1991. Also, there were loans of U.S.$470 million for 'consumer commodities' (whatever this means: both Russia and Xinhua could be garbling the translation into English), which had a maturity of 2 years.
• Of the principal and interest, Russia has repaid U.S.$338.2 million, and is U.S.$1.7 billion in arrears.
• This has been refinanced to 15 years of installments, a 2 year grace period, and payment in kind is allowed.

• The contract talks between Hawaii's International Longshoremen's and Warehousemen's Union, and the union's employers, has resulted in a tentative contract: no strike is expected, now. Hawaii's Governor Ben Cayetano was reported as predicting there would be no strike [but why not mention this when he said it, rather than now??]
• Ecuador's military has warned that the only way democracy can survive in Ecuador is to meet the basic needs of the population. Apparently, the current government is in danger of ceasing to exist by its own political infighting.
• The current estimated loss on loans owed by affiliates of Daewoo is now 40% to 50%. This is drastically higher than South Korea's estimate of 30% to 35%. Within affilates, the expected range is now 20% to 60%. Daewoo Corp. is expected to exceed 50%, while Daewoo Motor Co is expected to be slightly below 50%.

• Hawaii's International Longshoremen's and Warehousemen's Union has resumed contract talks, presumably in an effort to avoid an approved strike that would cripple Hawaii's economy.
• Ecuador has also defaulted on Eurobonds and PAR Brady bonds. A $27.3 million Eurobond payment and a $33.1 million PAR Brady bond payment, both due November 1, 1999, are being deferred. Ecuador's current restructuring plan now includes 50% of its internal debt. Only deals with multilateral lending agencies are exempt from the current restructuring. While Ecuador has finally overtly realized that a comprehensive restructuring is required, its failure to do so quickly [in August 1999] has cost Ecuador much credibility.

• Malaysia's international reserves have fallen to 113.95 billion ringgit as of Oct. 15, 1999 from 119.28 billion ringgit at the end of September 1999. This was described as the largest drop since July 1997, the start of the Crash. The next lowest level these reserved had assumed recently was 113.17 billion ringgit, on May 31, 1999.
• 3.0 billion ringgit of the 5.33 billion ringgit drop was said to be the repayment of international debt.
• 1.5 billion ringgit of this was said to be from accelerated outflows of portfolio investment.
• However, the outflows to date have only been about three-tenths of the upper bounds predicted.
• This leaves 0.83 billion ringgit of foreign reserve decline unaccounted for. This should be acceptable.
• Zimbabwe's just-announced budget for fiscal 2000 does practically nothing about or for Zimbabwe's economic crisis. Zimbabwe's Finance Minister Herbert Murerwa carefully avoided all mention of Zimbabwe's relations with the IMF and the World Bank, and also carefully avoided naming inflation and economic growth targets.
• Considering Zimbabwe's cultivating of diplomatic relations with Malaysia, is this really a surprise??
• Whoever was responsible for lying to the IMF about defense spending probably made contingency plans for if Zimbabwe was caught.
• Malaysia has managed to fend off the Crash by methods that defy IMF advice, so they are a reasonable advisor for any nation (such as Zimbabwe) that is deliberately torching relations with the IMF.
• This is how I initially classified Zimbabwe as being in trouble: they were explicitly seeking advice from Marathir....
• Unfortunately, Malaysia has an inside straight that Marathir doesn't like to mention: an oil company that has U.S.$ revenues that are politically controlled. Malaysian currency defense normally comes first from the oil company revenues. The central bank reserves are a backup method, not a primary method.

• The European Union has suspended talks with Zimbabwe on a U.S.$31.6 million aid program, pending an agreement between President Robert Mugabe's government and the International Money Fund.
• The IMF placed its U.S.$193 million 14-month aid program on review after Mugabe's government was caught verifiably lying to the IMF. It is impossible to reconcile the official statement of $3 million/month [for each month in 1999] spending on supporting Kabila's Congo government with an internal memo (that leaked) documenting spending in this category at $166 million. [It is unspecified whether these two references are to U.S.$ or Z.$. I think U.S.$.]
• The World Bank has also put talks about an aid program worth U.S.$140 million on hold, pending a resolution of Zimbabwe's problems with the IMF.

• Unidentified sources say that Daewoo has reached a tentative agreement with its international creditors to reschedule debt payments. These debts are estimated at $5 billion. Daewoo's major international creditors include:
• United States: Chase Manhattan Corp. and Citibank.
• Britain: HBSC Holdings PLC
• Netherlands: ABN Amro Bank
• National Australia Bank Ltd.
• Japan: Bank of Tokyo-Mitsubishi, Dai-Ichi Kangyo Bank Ltd.
• Arab Bank of Jordan

• Walid Alomar & Associates, a U.S. investment fund, has made new, unexpected demands regarding its purchase of Daewoo Electronics:
• Daewoo Electronics has been required to use U.S. practices in its accounting.
• Daewoo Electronics' current management must be replaced with new management that is internationally recognized.
• All of Daewoo Electronics' financial transactions with its affiliates must be settled.
• Daewoo Electronics must be given sufficient fund support by creditors.
• An anonymous analyst thinks this deal is in trouble, and that the demands are intended to get financial transparency that has not been supplied yet. A nameless executive in charge of the deal at Hanvit Bank indicates he thinks the deal's chance of going through is about 50%.
• Actually, this is an understatement. The demand to use U.S. accounting practices may be fatal in and of itself. The management replacement will also be politically difficult.

• Telekom Malaysia Bhd has pulled out of a proposed deal to deal with the Singapore Central Limit Order Book [CLOB] shares that Malaysia froze in August 1998. Since the former deal was announced, Telekom's shares had fallen 20% on the Malaysian stock market. The pullout was greeted by a 3.6% rise in these shares.
• This issue must be resolved before Morgan Stanley Capital International lists Malaysia in its emerging market indices. The earliest announced candidate date for reinstatement is now Feb. 2000.

• Red China announced that its GDP had grown at 7.4% for Jan.-Sept. 1999 [I'm not sure about the measuring conventions], and that the government target of 7% growth for 1999 appeared to be on track. However, China's retail price index [RPI]:
• fell 2.8% from Sept. 1998 to Sept. 1999, in contrast to
• 3.4% from June 1998 to June 1999, and
• 2.6% for both July 1998 to July 1999 and Aug. 1998 to Aug. 1999.
• The International Longshore and Warehouse Union Local 142 has given notice to the Hawaii Employer's council that the current contract would be terminated on October 24, 1999.
• This opens up the possibility of a dock strike, which would temporarily shut down 90% of imports into Hawaii.
• This decision was made after a U.S. Federal judge ordered a work slowdown to end.
• The ILWU wants 8% wage increases or so, similar to what they wrested from the West Coast earlier this year.
• Supermarkets suffered a run on staples such as food and toilet paper, while restaurants and other businesses made plans to fly in supplies.

• Japanese police raided the Tokyo branch of Credit Suisse Financial Products (CSFP), a unit of Credit Suisse Group, on suspicion that the management directly obstructed an earlier inspection by Japanese financial regulators.
• It is known that employees did obstruct the investigation. However, Credit Suisse's official position is that this was done without authorization.
• Japan's Financial Supervisory Authority is planning to file criminal charges.
• Brazil's offer to exchange $500 million in Brady bonds for new 10-year global bonds was described as offering some value to investors, but making little sense for Brazil itself.
• The deal was said not to help Brazil's short-term debt, and might prove expensive considering the sharp rise in U.S. Treasury yields since October 13, 1999.
• The estimated basis point spread above U.S. Treasuries was speculated to be about 820 points, which would translate to a yield of ~14.85%.
• In contrast, when the deal was suggested (October 7?, 1999), the spread current then, plus the current Treasury yield then, would have given a yield of ~13%.
• A graph of 10-year U.S. Treasury yields on Dr. Yardeni's Economics Network [see my Research links] suggests that the 10-year U.S. Treasury has gone up roughly 0.5% in yield from October 5 to October 12, 1999.
• This deal is expected to free up about $200 million of collateral, which is superficially insignificant against $40 billion in foreign currency reserves.
• The exclusion of IDU and EI bonds (the short-term ones) makes no sense to bankers.

• The Dow Jones Industrial Average has finally started acting like the rest of the U.S. stock market: today, it closed 11.5% under its all-time high. This puts the Dow Jones in an obvious 'correction', if not worse.
• The typical stock on the New York Stock Exchange is down over 20% for the year so far.

• The Bank of Japan has finally considered loosening its money policy further. It is planning to sell its own short-term Japanese government securities. This is only a qualitative easing, not a quantitative easing. [A quantitative easing is very dangerous if it fails: less-than-controlled inflation.]

• Pakistan's coup [initiated on October 11, 1999, when the former Prime Minister tried to sack the chief of the armed forces six months early, possibly in violation of procedure. The army captured the Prime Minister in retaliation, etc.] has endangered an IMF-sponsored plan to try to resuscitate Pakistan's economy.
• Pakistan isn't really affected by the Crash...but there are many Crash-affected nations that are in better shape. Right now, it appears that only Russia, Indonesia, and Ecuador are in worse condition.

• Natasha Gurfinkel Kagalovsky, a former senior vice-president at the East European branch of the Bank of New York's East European division, has resigned. She has been on paid leave, since August 18, 1999, because of the investigation into the ROCML Scheme@BNY. While she is the wife of one of the indicted parties, she had no way of influencing any of the accounts that provoked the initial indictment. In particular, her husband's accounts were superficially not involved in her division.
• Konstantin Kagalovsky (Natasha's husband, who is indicted) is a former IMF representative in Moscow -- justifying concerns about IMF money being involved in the ROCML Scheme@BNY.
• The U.S. FDIC is reporting the biggest losses since the banking crises of New England and Texas [from collapses in real estate and oil booms, respectively] in 1992. Five bank failures (so far) have cost the fund U.S.$760 million. The FDIC still has U.S.$29.8 billion in its insurance fund. 1992 had 122 bank failures.
• Up to U.S.$750 of these losses are from the failure of First National Bank in Keystone [based in Keystone, West Virginia]. The FDIC was able to document fraud that depleted the bank's capital.
• One instance: $515 million in loans remained on the bank's books after they had been sold.

• South Korea's Daewoo group has a deadline of November 6, 1999 to come up with a debt restructuring plan. If no such plan is in place by November 10, 1999, investors will have the option to try to cash in $50 billion of Daewoo bonds.
• Considering that Daewoo has wanted emergency cash since July 1999 to cover debt payments, this would be a Daewoo bond meltdown.

• The U.S. Federal District Court in New York indicted the following for the laundering of U.S.$7 billion in the ROCML Scheme@BNY:
• Peter Berlin
• Lucy Edwards [vice president in East European division of Bank of New York; officer of Benex and Becs; wife of Peter Berlin]
• Aleksey Volkov
• Benex International Co. Inc. [President: Peter Berlin; Aleksey Volkov was a signatory on this account]
• Becs ICorp. [President: Peter Berlin; Lucy Edwards was a signatory on this account]
• Torfinex Corporation [President: Aleksey Volkov]
• Maximum penalties:
• Berlin and Volkov: 15 years prison, fines of $750,000 or twice the gains from the offenses.
• Edwards: 5 years in prison, and fines
• Corporations: $1.5 million fine each, or twice the gains from the offenses.
• The investigation is not complete yet. There are plans to file further charges. The Russian authorities have been cooperating in this.

• Ecuador's President Jamil Mahuad made the following comments about the Brady bondholder vote on October 1, 1999:
• Mahuad expects Brady bond holders are likely to turn to the U.S. courts soon and file suit against Ecuador.
• Mahuad also expects a legal ruling to take up to twelve months: enough time to negotiate a substantial reduction in Ecuador's debt burden to make it compatible with Ecuador's capacity to pay.
• Mahuad added that Ecuador would only accept a substantial reduction in its debt in negotiations with bond holders.
• Mahuad said that bond holders might try to have courts seize Ecuadorean government property, but would not be able to touch the country's foreign reserves or the property of state companies.
• While Ecuador has a $350 million loan deal from the IMF, with $1.2 billion in auxillary loans from multilateral lending agencies, the conditions for these require economic measures that he may not have the political strength to implement. Even if he can convince the two-thirds of Ecuador's Congress that is not loyal to go along with these measures, the unions may be able to force Ecuador to renege anyway. [The unions already have proven they can do this.]

• On September 29, the Republic of Columbia negotiated a weaker restraining order against Ecuador's Banco Popular del Ecuador, and its Bahamas affiliate, Banco Popular International Limited (Nassau). [Recall that the Republic of Columbia is suing for $64 million in tax and custom revenues.]
• Banco Popular del Ecuador is to hold U.S.$7 million in a segregated account pending further court order.
• An independent party is to maintain custody of all documents and records of Banco Popular del Ecuador's Miami Agency.
• The Republic of Colombia has agreed to let Banco Popular del Ecuador have access to its "payable through" accounts for the purpose of satisfying various third-party obligations.
• As a result of the interim agreement, the Florida Department of Banking and Finance may proceed with the closure of Banco Popular del Ecuador's Miami Agency.

• Creditors today voted to demand immediate payment of principal and interest on $1.4 or $1.6 [the two sources differ!] billion of Ecuador's Brady bonds. They know Ecuador cannot pay; this move is intended to stop Ecuador's "partial default" plan, which is viewed as a dangerous precedent that should not be allowed to succeed. This action puts Ecuador in default of all $6 billion of its Brady bonds.
• Michael Cembalest, portfolio manager at J.P. Morgan Investments, stated that the bondholders have declared Ecuador insolvent.

• Japan's jobless rate declined to 4.7% for August 1999, from 4.9% for July 1999. The decline was entirely in men's unemployment [from 5.1% to 4.7%; women's unemployment remained constant at 4.6%]. The ratio of job offers to job seekers remained constant from July 1999 to August 1999, at 0.46.
• Russia's second tranche of IMF loan money ($640 million) appears likely to be delayed by at least one to two months.
• Russia's Finance Minister Mikhail Kasyanov described the latest meetings as "None of us can be satisfied now. These were not negotiations. There are no negotiations."
• The Russian Parliament is already hostile to the Year 2000 budget, since it is too heavily influenced by the IMF.
• The IMF imposed four new requirements (in light of the ROCML Scheme@BNY investigation):
• Quarterly reporting of central bank reserves management.
• A schedule for the bank and commercial banks to adopt international accounting standards.
• Central bank severance of its links to offshore affiliates.
• Adherence to an IMF code on monetary and credit policy.
• Kasyanov said these requirements were already 80% met.